<PAGE>
3
As filed with the Securities and Exchange Commission on September 1, 2000.
Registration No. __________
=======================================================================
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MEGAMEDIA NETWORKS, INC.
------------------------
(Name of small business issuer in its charter)
DELAWARE 514191 87-0633630
------ ------ ----------
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
57 WEST PINE STREET
ORLANDO, FLORIDA 32801
(407)245-3636
-------------
(Address and telephone number of principal executive offices)
Same as above
--------------
(Address of principal place of business
or intended principal place of business)
William A. Mobley, Jr.
57 WEST PINE STREET
ORLANDO, FLORIDA 32801
(407) 245-3636
--------------
(Name, address and telephone number of agent for service)
Copies to:
Branden T. Burningham, Esq.
455 East 500 South, Suite 500
Salt Lake City, Utah 84111
(801) 363-7411
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
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4
If this Form is a post effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [_]
If this Form is a post effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
============================================================================
CALCULATION OF REGISTRATION FEE
Title of
Each Proposed Proposed
Class of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price per Offering Registration
Registered Registered Share (1) Price (1) Fee
---------- ---------- --------- --------- ---
Common Stock, 5,793,930 $0.1244 $720,764.89 $200.37
$0.01 par value. shares
============================================================================
(1) Estimated solely for the purpose of calculating the registration fee on
the basis of book value per share of our common stock, as there is no public
market for our common stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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5
MEGAMEDIA NETWORKS, INC.
5,793,930 Shares of Common Stock
This prospectus covers an aggregate of 5,793,930 shares of our common
stock, which will be sold, from time to time, by some of our stockholders. These
stockholders previously received all of these shares of common stock from us. We
will not receive any money from the stockholders when they sell their shares of
common stock. We have agreed to pay all costs and expenses relating to the
registration of our common stock, but any stockholders who sell their shares
shall be responsible for any related commissions, taxes, attorney's fees and
related charges in connection with the offer and sale of these securities. The
stockholders may sell all or a portion of the shares registered by this
registration statement in private transactions or in the over-the-counter market
at prices related to the prevailing prices of our common stock at the time of
negotiation. The stockholders may sell their common stock through one or more
broker-dealers, and such broker-dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the stockholders.
Our common stock is not currently quoted on any exchange. One reason for
our registration of these securities is to help us obtain a trading symbol on
the OTC Bulletin Board of the National Association of Securities Dealers, Inc.
However, we can not assure you that we will be able to obtain a symbol.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE THE CAPTION "RISK
FACTORS," BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
You may rely only on the information contained in this prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. Neither the delivery of the prospectus nor the sale of common
stock means that information contained in this prospectus is correct after the
date of this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy these shares of common stock in any
circumstances under which the offer or solicitation is unlawful.
The date of this prospectus is __________, 2000.
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6
TABLE OF CONTENTS
Available Information . . . . . . . . . . . . . . . . . . . . . . . . 7
Prospectus Summary. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Determination of Offering Price and Dilution . . . . . . . . . . . . .16
Selling Security Holders . . . . . . . . . . . . . . . . . . . . . . .16
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . .19
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Directors, Executive Officers, Promoters and Control Persons . . . . .21
Security Ownership of Certain Beneficial Owners and Management . . . .24
Description of Securities . . . . . . . . . . . . . . . . . . . . . . 25
Interest of Named Experts and Counsel . . . . . . . . . . . . . . . . 27
Disclosure of Commission Position on Indemnification for Securities . 28
Act Liabilities
Description of Business . . . . . . . . . . . . . . . . . . . . . . . 28
Management's Discussion and Analysis or Plan of Operation . . . . . . 36
Description of Property . . . . . . . . . . . . . . . . . . . . . . . 40
Certain Relationships and Related Transactions . . . . . . . . . . . .40
Market for Common Equity and Related Stockholder Matters . . . . . . .41
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . .42
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . .47
Changes in and Disagreements with Accountants on Accounting and . . . 62
Financial Disclosure
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7
AVAILABLE INFORMATION
We file periodic reports with the Securities and Exchange Commission. These
documents may be inspected and copied at the Public Reference Room of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the Commission at 1-800-SEC-0330 for additional
information. Our Commission filings are also available from the Commission's web
site: http://www.sec.gov.
We have filed a registration statement with the Commission on Form SB-2,
under the Securities Act of 1933, with respect to the securities described in
this prospectus. This prospectus is filed as part of the registration statement.
It does not contain all of the information set forth in the registrations
statement and the exhibits and schedules filed with it. For further information
about us and the common stock described by this prospectus, we refer you to the
registration statement and to the exhibits and schedules filed with it. You may
inspect or obtain copies of these documents from the Public Reference Branch.
They are also available on the Commission's web site.
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8
PROSPECTUS SUMMARY
MEGAMEDIA NETWORKS, INC.
------------------------
Since this is a summary of the matters described in this prospectus, it
does not contain all of the information that may be important to you. This
prospectus contains "forward- looking" information within the meaning of the
Private Securities Litigation Reform Act of 1995. We believe that the
forward-looking statements contained in this prospectus are within the meaning
of the safe harbor provided by Section 27A of the Securities Act of 1933.
Forward-looking statements contained in this prospectus involve known and
unknown risks, uncertainties and other factors that could cause actual results,
financial or operating performance to differ from the future results, financial
or operating performance or achievements expressed or implied by such
forward-looking statements. You should read the following summary and the "Risk
Factors" section along with the more detailed information, financial statements
and the notes to the financial statements appearing elsewhere in this prospectus
before you decide whether to purchase the common stock described in this
prospectus.
The Company
-----------
MegaMedia Networks, Inc. is a global Internet broadcast company. We
specialize in "on-demand" delivery of entertainment content through our portal
site at www.megachannels.com. MegaChannels product offerings include:
movies;
television programming;
live events;
sports programming;
animation; and
"made for the Internet" interactive content.
We offer entertainment products to consumers in subscription, pay-per-view
and advertising-driven, free formats. Through MegaChannels, we began offering
content and associated merchandising to consumers in March 2000.
Our principal executive offices are located at 57 West Pine Street,
Orlando, Florida 32801, and our telephone number is (407) 245-3636.
The Offering
------------
Securities offered by us . . . None
Securities that may be sold
by our stockholders . . . . . . 5,793,930 shares of our common stock.
Use of proceeds . . . . . . . . We will not receive any money from any
stockholders when they sell their shares
of common stock.
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9
Offering Price . . . . . . . . .Market prices
prevailing at the time of sale, at prices
related to the prevailing market prices, at
negotiated prices or at fixed prices, all of
which may change.
Transfer Agent . . . . . . . . .Atlas Stock Transfer,
5899 South State, Murray, Utah 84107, serves
as the transfer agent and registrar for our
outstanding securities.
RISK FACTORS
------------
An investment in MegaMedia's common stock is very speculative and involves
substantial risks. In addition to the general investment risks and other
information in this prospectus, you should carefully consider the following
factors before making an investment decision.
We face many risks and uncertainties over the next 12 months. These risks
include our ability or inability to:
obtain additional financing;
attract and retain technical, marketing and other personnel;
manage growth effectively;
effectively compete against competitors who have more resources; and
enter into strategic relationships with additional suppliers,
including studios and independent film companies.
We face many additional risks, including:
We Have a Very Limited Operating History.
-----------------------------------------
We had no material operations until March 25, 2000. That is the date that
we launched our web site. You should be aware of the difficulties that new
companies in a highly competitive industry normally encounter. We have limited
evidence that our business plans will prove successful or that we will be able
to market our services successfully. We can not assure you that we will be able
to operate profitably in the future.
We Have a History of Financial Losses.
-------------------------------------
Because we did not launch our web site until March, 2000, we have a history
of financial losses. During the period May 27, 1999 (date of inception) through
December 31, 1999, we had a net loss of $857,249, with no revenues. During the
six months ended June 30, 2000, we had a net loss of $4,437,679, with net sales
of $438,640. We can not assure you that our business operations will ever be
profitable.
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10
A Third Party is Seeking an Injunction Against Our Use of Our Web Site.
----------------------------------------------------------------------
On or about June 6, 2000, Snickelways, Inc., a New York corporation, filed
a complaint against us in the U.S. District Court for the Southern District of
New York. The complaint seeks damages of $138,784.66 plus interest and costs,
including attorneys' fees, and an injunction barring us from using our web site.
If Snickelways obtains this injunction, we will be unable to use our web site
and will not receive any revenue until we can develop a separate web site or
another source of revenue. See the caption "Legal Proceedings" of this
prospectus.
We May Have Difficulty Obtaining Funding in the Future.
-------------------------------------------------------
Our operations have required us to spend large amounts of money. This will
continue in the future. Since our inception, we have financed our development
and operations through the sale of stock in private placements. As of August 15,
2000, we had raised a total of approximately $7,200,000 through three private
placement offerings. At June 30, 2000 we had approximately $15,046 in cash and
cash equivalents. We intend to use our existing cash to fund our working capital
and capital expenditures for the next six months. However, we will need
additional money to fund our operations during this six-month period. We will
also need to raise additional cash through the sale of stock or by taking on
debt to fund our operations for the next 12 months. The sale of stock may result
in substantial dilution of the percentage of share ownership of current
stockholders. We may not be able to get additional funding through the issuance
of securities. If not, we will have to significantly scale back operations. This
would probably hurt our operating performance. Our ability to raise funding may
be severely limited due to our limited operating history and the lack of a
public market for our common stock.
Our Unaudited Financial Statements Contain a "Going Concern" Qualification.
--------------------------------------------------------------------------
Note A to our unaudited financial statements for the three months and
six months ended June 30, 2000, expresses uncertainty about our ability to
continue as a going concern. This is due to our need to raise additional capital
and the uncertainty as to whether we will be able to raise it.
The Highly Competitive Nature of the Internet Industry May Limit Our Chances
of Success.
-----------
The market for Internet broadcasting services is highly competitive. We
expect that competition will continue to intensify. We compete with:
other websites, Internet portals and Internet broadcasters to acquire
and provide content to attract users;
online services, other website operators and advertising networks, as
well as traditional media such as television, radio and print, for a
share of advertisers' total advertising budgets; and
local radio and television stations and national radio and television
networks for sales of advertising spots.
We may not be able to compete successfully in our industry. The competitive
pressures that we face may hurt our business. Broadcast.com is probably our
largest competitor.
MegaChannels has a physical structure that is very similar to that of
Broadcast.com. Broadcast.com. was acquired by Yahoo.com. That acquisition
combines Broadcast.com, which is the current leading aggregator and broadcaster
of "software necessary" streaming audio and video programming, with Yahoo.com,
one of the world's leading Web networks. Yahoo.com serves about 70 million
unique visitors per month. This acquisition expanded Yahoo.com's rich multimedia
content offerings for its users. It is now the industry leader.
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11
Broadcast.com offers streaming media content such as live continuous
broadcasts of over 400 radio stations and networks, broadcasts of over 60 TV
stations and cable networks, and game broadcasts and other coverage of over 475
college and professional sports teams. The site also offers live concerts;
on-demand music; special-interest shows and Internet-only "Webcasts"; and over
1,600 full-length audiobooks. Broadcast.com also delivers turnkey broadcasting
and interactive multimedia advertising.
Other large Web portals that directly compete with MegaChannels in one form
or another include the following:
Yack.com -- Yack.com offers webcasters and viewers an open,
non-player/content specific, streaming media site. It offers the
broadcast spectrum of streaming media content on the Web. Yack.com's
webcasting partners include ForeignTV.com; The Auto Channel; CNN; the
House of Blues; Pseudo; and the Rolling Stone Network. Yack.com also
offers a reminder service for its viewers.
TV on the WEB -- TV onthe WEB offers on-demand archiving and live
webcasting applications. The TV onthe Web Network specializes in
narrowcasting to specific business-to-business and special interest
groups through revenue-generating TV channels. These channels are
underwritten by organizations well known in niche communities. This
business model has created revenues from live events; advertising;
e-commerce; pay-per-view; and subscription sources.
Excite.com -- Excite.com is a leading Web portal that offers free,
personalized information and services. These include 18 content
channels; state-of-the-art search technology; Web-based email; PAL
instant messaging; chat; and on-line shopping.
Lycos.com -- The Lycos Network is estimated to be one of the most
visited hubs on the Internet. It purportedly reaches one out of every
two Web users. Its network sites include Lycos.com; Tripods;
Angelfire; WhoWhere; MailCity; HotBot; HotWired; Wired News;
Webmonkey; Suck.com; and MyTime.com. The Lycos Network provides search
and navigation; communications and personalization tools; homepage
building and Web community services; and a shopping center.
MSN -- The Microsoft Network is the third-largest on-line service in
the world. It offers services, communications and communities, as well
as Internet entertainment. MSN also provides hundreds of
special-interest forums and bulletin boards, along with Web shows such
as: the Microsoft Encarta multimedia encyclopedia; the Expedia travel
service; Star Trek; Continuum; Disney's Daily Blast and Disney's
Family.com; the Slate online magazine; the CarPoint on-line automotive
service; the Microsoft Investor on-line investing service; and
up-to-date news and information from MSNBC News.
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GO Network -- Go Network is a fairly new brand to the Internet. It is
part of the Infoseek Corporation. GO Network family sites include:
espn.com; disney.com; family.com; ABCnews.com; ABC.com; Mr.ShowBiz;
and Wall of Sound.
The market for Internet services is relatively new, intensely competitive,
rapidly evolving and subject to rapid technological change. MegaMedia expects
competition to increase in the future. Most of our current and potential
competitors have longer operating histories, larger installed customer bases,
longer relationships with clients and significantly greater financial,
technical, marketing and public relation resources than we do. They could decide
at any time to increase their resource commitments to our target market. In
order to remain competitive, we may have to make certain pricing, service
technology or marketing decisions. We can not assure you that these decisions
will lead to success. Competition of the type described above could
significantly impair our prospects.
Our ability to generate clients will depend largely on the quality of our
services and our reputation among our customers and potential customers. If we
lose customers to our competitors because of dissatisfaction with our services,
or if our reputation is damaged for any other reason, our revenues will likely
decrease and our prospects could be materially impaired.
Any Future Governmental Regulation of the Internet May Hurt Our Operations.
---------------------------------------------------------------------------
There are currently few laws and regulations directly applicable to the
Internet. However, the United States and other jurisdictions are likely to adopt
new laws and regulations. These laws and regulations will probably address
issues such as privacy, pricing, sales taxes and the characteristics and quality
of Internet services. Governments may also begin regulating content, network
security, encryption and privacy protection, electronic authentication or
"digital" signatures, illegal and harmful content, access charges and
retransmission activities. We are not certain whether existing laws governing
issues such as property ownership, content, taxation, defamation and personal
privacy apply to the Internet. The majority of these laws were adopted before
the widespread use and commercialization of the Internet. As a result, they do
not address the unique issues of the Internet and related technologies. Any new
legislation, regulation or governmental enforcement of existing regulations may
limit the growth of the Internet, increase our cost of doing business or
increase our legal exposure. All of these things could have a negative effect on
us.
On October 28, 1998, Congress enacted the Digital Millennium Copyright Act.
The DMCA permits statutory licenses for the performance of sound recordings and
for the making of ephemeral recordings to facilitate transmissions. Under these
statutory licenses, we will have to pay licensing fees when we play sound
recordings in original and archived programming and when we retransmit radio
broadcasts. The DMCA does not specify the rate and terms of the statutory
licenses. They will be determined either through voluntary inter-industry
negotiations or through arbitration. By distributing content over the Internet,
we also face potential liability based on the nature and content of the
materials that we distributes. These claims could include claims for defamation,
negligence, and copyright, patent or trademark infringement. These types of
claims have been brought, and sometimes successfully litigated, against Internet
companies in the past.
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The current law generally states that entities like MegaMedia, which
provide interactive computer services, will not be treated as the publisher or
speaker with respect to third party content that they distribute. However, the
scope of the law's definition and limitations on liability have not been widely
tested in court. As a result, we may be subject to such claims. To protect
itself from such claims, MegaMedia maintains media liability insurance and
general liability insurance. Additionally, in our agreements with content
providers, the content providers generally represent that they have the rights
to distribute and transmit their programming on the Internet. In most cases,
they also agree to indemnify us for liability based on a breach of these
representations and warranties. The indemnification arrangements and our media
and general liability insurance may not cover all potential claims of this type
or may not be adequate to indemnify us for any liability that may be imposed.
Any liability not covered by indemnification or insurance or in excess of
indemnification or insurance coverage could damage our business.
We May Have Trouble Protecting Our Intellectual Property.
---------------------------------------------------------
We regard our copyrights, trademarks, trade secrets and similar
intellectual property as important to our success. We rely on a combination of
copyright and trademark laws, trade secret protection, confidentiality and
non-disclosure agreements and contractual provisions with our employees and with
third parties to establish and protect our proprietary rights. These steps may
not be adequate. We may be unable to secure trademark registrations for our
marks in the United States or other countries. Third parties may also infringe
upon or misappropriate our copyrights, trademarks, service marks and similar
proprietary rights. In addition, effective copyright and trademark protection
may be unenforceable or limited in certain countries, and the global nature of
the Internet makes it impossible to control the ultimate destination of our
broadcasts. In the future, we may have to use litigation to enforce and protect
our trade secrets, copyrights and other intellectual property rights.
Uncertainty about the Future of the Internet May Cause Uncertainty about Our
Operations.
-----------
Because the Internet is such a new commercial medium, critical issues as to
its viability remain unresolved and may limit the growth of e-commerce. These
issues include security, reliability, cost, ease of use and access, and quality
of service. Although we believe that our Internet-related products and services
are commercially viable and that the number of Internet users will continue to
grow, we can not assure you that commerce and communication over the Internet
will become widespread, or that our products or services will become widely
recognized or used.
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14
Our Operations Will Depend on Adequate Internet Infrastructure.
---------------------------------------------------------------
Marketing and distribution of our products and services will require
adequate infrastructure for providing Internet access and carrying growing
Internet traffic. The Internet may prove not to be a viable commercial
marketplace because of inadequate development of necessary infrastructure such
as a reliable network backbone, or timely development of related products such
as high-speed modems or other quickening devices. Because global commerce and
online networks are still relatively new and evolving, we can not predict
whether the Internet will prove to be a viable commercial market. If it does
not, our business operations and financial condition could suffer.
Capacity Constraints May Limit Our Ability to Make Sales.
---------------------------------------------------------
Our business operations depend on a high volume of traffic on our
Internet site. In order to attract new customers, our site must perform well and
be consistently available. Reliable network infrastructure and Internet commerce
processing systems are also critical to our ability to attract and retain new
customers. Any systems interruptions that make our site unavailable or that
limit our ability to process orders could reduce the volume of goods and
services that we sell. If demand for our goods and services grows, we will have
to expand and upgrade our Internet technology, including our computer network
and Internet commerce processing systems. We cannot assure you that we will
accurately predict the need for any such expansion or upgrade, or that we will
be able to make any such expansion or upgrade in a timely manner.
A Computer System Failure Would Hurt Our Operations.
----------------------------------------------------
Our ability to receive and process orders for products and services depends
on efficient, uninterrupted operation of our computer and communications
equipment. Virtually all of our computer and communications equipment is located
at our offices at 57 West Pine St. in Orlando, Florida, and at Titan Hosting,
Inc. in Tampa, Florida. Our computer and communications equipment is vulnerable
to flood, earthquake, power loss, telecommunications failure, and other similar
events. We do not have redundant systems or a contingent disaster recovery plan.
Nor do we carry adequate business interruption insurance to cover potential
losses that may result from such an event. Our computer equipment is also
vulnerable to computer viruses, break-ins and similar events that could lead to
interruptions, loss of data or malfunction. Any such event would limit our
revenues during the "down time" and may be expensive to repair.
The Potential Security Risks of Online Commerce May Make Our Products and
Services Less Desirable.
------------------------
One challenge to the success of online commerce is the secure transmission
of confidential information such as customer credit card numbers. We rely on
encryption devices supplied by third parties to provide this security. However,
computer capabilities, new discoveries in encryption technology or other
circumstances may create a breach of the security devices that we use to protect
<PAGE>
15
confidential data. If such a breach were to occur, our reputation, business
operations and financial condition could all be damaged. We may have to spend
additional money to protect against such breaches. In addition, consumer
concerns about Internet security may make our products and services less
attractive.
We Rely Heavily on Existing Management.
--------------------------------------
Our operations depend primarily upon the experience and expertise of
William A. Mobley, Jr. (Chairman of the Board and Chief Technology Oficer);
David A. Gust (Chief Executive Officer, President and director); and Stephen H.
Noble, III (Vice President, Chief Financial Officer and Secretary/Treasurer). We
do not cary any "key man" insurance coverage on Messrs. Mobley, Gust or Noble.
The loss of any of these officers would seriously impede our operations. We also
depend on our ability to attract and retain qualified personnel to support our
anticipated growth. We can not assure you that we will be able to attract
qualified personnel.
There Is No Market for Our Common Stock.
----------------------------------------
We have submitted for quotation of our common stock on the OTC Bulletin
Board of the National Association of Securities Dealers, Inc. However, these
efforts have been unsuccessful so far, and there is currently no market for our
shares. We have registered these shares partly to assist us in obtaining
quotations for our common stock. We can not assure you that we will ever develop
or maintain a market for our shares. If we do not, our stockholders are likely
to have trouble selling their shares.
Any Future Market for Our Shares Will Probably Be Volatile.
-----------------------------------------------------------
Any future market for our common stock is likely to be very limited. We
cannot assure you that a larger market will ever be developed or maintained. The
market for our common stock is likely to be volatile and many factors may affect
the market. These include, for example:
our success, or lack of success, in marketing our products and
services;
competition;
governmental regulations; and
fluctuations in operating results.
The stock markets generally have experienced, and will probably continue to
experience, extreme price and volume fluctuations. These fluctuations have
affected the market price of the shares of many small capital companies and have
often been unrelated to their operating results. Broad market fluctuations, as
well as general economic and political conditions, may decrease the market price
of our common stock in any market that develops.
You Should Not Expect the Payment of Dividends from Your Investment.
--------------------------------------------------------------------
MegaMedia does not expect to pay dividends on its common stock in the
foreseeable future. Any future dividends will depend upon our earnings, if any.
Investors who will need cash dividends from their investment should not purchase
our common stock.
<PAGE>
16
USE OF PROCEEDS
---------------
We will not receive any of the proceeds from our stockholders' sale of our
common stock.
DETERMINATION OF OFFERING PRICE AND DILUTION
--------------------------------------------
We will not receive any money from the stockholders when they sell their
shares of common stock. The stockholders may sell all or some of their common
stock in private transactions. If the NASD approves our common stock for trading
on the OTC Bulletin Board, they may also sell their shares in the
over-the-counter market, at prices related to the prevailing prices of our
common stock at the time of negotiation. Because we can not accurately predict
the prices of such sales, we can not accurately estimate the amount of any
dilution that may result from the purchase of these shares. However, the net
tangible book value of our common stock on June 30, 2000, was $0.0175 per
share. Net tangible book value per share is determined by subtracting our total
liabilities from our total tangible assets and dividing the remainder by the
number of shares of common stock outstanding.
There is no established public market for these securities. We have a very
limited operating history and revenues. We lack profits and do not pay
dividends. Our operations are also subject to the risk factors identified above.
You should not ascribe any value to our common stock. You are likely to suffer
significant dilution relative to any value you may ascribe to the shares you
receive under this prospectus.
We can not assure you that any public market for our common stock will ever
develop or, if it does, that any public market will equal or exceed the sales
price of the shares of common stock sold by our stockholders. Purchasers of the
shares face the risk that their shares will not be worth what they paid for
them.
SELLING SECURITY HOLDERS
------------------------
The following table shows the following information for our selling
stockholders:
o the number of shares of our common stock that they beneficially
owned as of August 2, 2000 and that are covered by this
prospectus; and
o the number of shares, if any, that they will retain after this
offering.
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17
Common Stock (1)
----------------
Number of Shares
Owned Prior to Number of Shares
and Registered Beneficially Owned
Name of Selling Stockholder in the Offering after the Offering(2)
--------------------------- --------------- ------------------
Jenson Services, Inc. (3) 170,000 -0-
Barbara Jenson 2,500 -0-
Duane S. Jenson (3) 66,835 -0-
Jeffrey D. Jenson (3) 50,000 -0-
Allan Bailey 20,390 -0-
Q-Marq Securities 1,250 -0-
Edna Bissell 500 -0-
Belinda Hernandez 500 -0-
Angela Shaw 500 -0-
Claudette McKay 500 -0-
Valerie Anderson 500 -0-
Peter D. Anderson 500 -0-
Gordian Investments, Ltd. 500 -0-
Huggermugger, Ltd. 500 -0-
Folkstone, Ltd. 500 -0-
Yankee Investments, Ltd. 500 -0-
Chantilly Investments, Ltd. 500 -0-
Charlie Investments, Ltd. 500 -0-
Cicero Cinzano, Ltd. 500 -0-
Cateria, Ltd. 500 -0-
Tango Investments, Ltd. 500 -0-
Fairweather Securities, Ltd. 500 -0-
Tara Edwards 500 -0-
Katie Ebanks 500 -0-
Patricia Ebanks 500 -0-
Peter O'Connell 500 -0-
John Benbow 500 -0-
Christine Benbow 500 -0-
Marsha Smith 500 -0-
Victoria Hollingsworth 1,250 -0-
Leonard W. Burningham 50,000 -0-
Nick Julian 2,500 -0-
Teresa K. Hardman 2,500 -0-
Mike Doolin 5,000 -0-
Vickie Rosenkrantz 2,500 -0-
Don Morrison 12,500 -0-
Kathleen Morrison 12,500 -0-
Craig Carpenter 2,500 -0-
Sectex LTDA 538,633 -0-
Outback Capital, Ltd. 36,000 -0-
Camisado Ventures, Ltd. 28,000 -0-
New York New York, Ltd. 36,000 -0-
Douglas Carley 605,000 -0-
Harry Timmons 605,000 -0-
Matt Carley 605,000 -0-
Richard C. Babcock 10,000 -0-
Charles M. Baxter 25,000 -0-
Liane M. Bennat 15,000 -0-
Robert Brazeau 5,000 -0-
Charles Charmatz 19,000 -0-
Donita Davis 15,000 -0-
<PAGE>
18
Patrick R. Estes 8,500 -0-
Allen W. Gambert 10,000 -0-
Rolando and Aurora Garcia 10,000 -0-
Charles Aubray Goldenberg 25,000 -0-
Scott Greenfield 5,000 -0-
Dwight Halden 50,000 -0-
Bruce Hammil 12,500 -0-
Frank M. Hartwick 5,000 -0-
Roger S. Marks 20,000 -0-
Dan and Sharon Marschlack 20,000 -0-
Dane and Tamara Marschlack 5,000 -0-
Rudy Mician 10,000 -0-
Huntington National Bank, 100,000 -0-
Trustee, Larry Murphy, IRA
Kerry McLeod 5,000 -0-
Tyler and Elizabeth Pratt 5,000 -0-
Pride Asset Management Co, Ltd. 35,000 -0-
Thomas N. Staub 12,500 -0-
Richard J. Suarez 23,000 -0-
Thomas N. Surtees 62,000 -0-
Kerry Stillmonkes 5,000 -0-
Adam K. Brinckmann 14,000 -0-
Julie Williams 2,500 -0-
Charles Pugh and Carrie Rogers 6,500 -0-
Shane Penrod 5,000 -0-
David Grossman 5,000 -0-
DLJ, Custodian FBO William Henning 10,000 -0-
DLJ, Custodian FBO Sabrina Marks 10,000 -0-
John Blanke 25,000 -0-
DLJ, Custodian FBO Scott Greenfield 12,500 -0-
DLJ, Custodian FBO Kenneth M.
Coppins 10,000 -0-
Robert D. Guerin 10,000 -0-
Dan Decker 30,000 -0-
William M. Beasley 25,000 -0-
Tim Melson 35,500 -0-
Hamilton-Carr, Inc. 360,000 -0-
Noble House of Boston, Inc. 400,000 -0-
City-Guide ISP, Inc. 200,000 -0-
Capital Access Management Group 440,000 -0-
Harriman Will Winsome, Inc. 350,000 -0-
Bishop, Alexander, Moore & Assoc. 350,000 -0-
Larry Murphy 5,000 -0-
Mike Clairborne 12,300 -0-
A. E. Joiner, Jr. 35,000 -0-
John O'Day 10,000 1,000
Mike Walters 1,772 -0-
Kay Page 5,000 -0-
Minol Amory 10,000 10,000
Robert P. Major 2,000 -0-
Victor E. Woodman 2,000 -0-
Wonsuck Kim 15,000 -0-
Joel Yanchuck 10,000 -0-
(1) We assume that none of these stockholders will purchase any shares of
our common stock in this offering.
(2) Assumes the sale of all securities being registered.
(3) Prior to our reorganization with MegaMedia Networks, Inc., a Nevada
corporation, in October, 1999, Jenson Services, Duane S. Jenson and
Jeffrey D. Jenson collectively owned approximately 79% of our
outstanding stock.
<PAGE>
19
PLAN OF DISTRIBUTION
--------------------
We are registering the shares of our common stock covered by this
prospectus.
We will pay the costs, expenses and fees of registering the common stock,
but our stockholders will pay any underwriting or brokerage commissions and
similar selling expenses relating to the sale of their shares.
If we are able to establish a market for our shares, our stockholders may
sell our common stock at market prices prevailing at the time of the sale, at
prices related to the prevailing market prices, at negotiated prices or at fixed
prices, any of which may change. Our stockholders may sell some or all of their
common stock through:
ordinary broker's transactions, which may include long or short
sales;
purchases by brokers, dealers or underwriters as principal and
resale by those purchasers for their own accounts under this
prospectus;
market makers or into an existing market for the common stock;
transactions in options, swaps or other derivatives; or
any combination of the selling options described in this prospectus,
or by any other legally available means.
In addition, our stockholders may enter into hedging transactions with
broker-dealers, who may engage in short sales of our common stock in the course
of hedging the positions they assume. Finally, our stockholders may enter into
options or other transactions with broker-dealers that require the delivery of
our common stock to those broker-dealers. Subsequently, the shares may be resold
under this prospectus.
In their selling activities, our stockholders will be subject to applicable
provisions of the Securities Exchange Act of 1934, and its rules and
regulations, including Regulation M, which may limit the timing of purchases and
sales of our common stock by our stockholders.
Those of our stockholders and any broker-dealers involved in the sale or
resale of our common stock may qualify as "underwriters" within the meaning of
Section 2(11) of the Securities Act of 1933. In addition, the broker-dealers'
commissions, discounts or concessions may qualify as underwriters' compensation
under the Securities Act of 1933. If any broker-dealer or any of our
stockholders qualifies as an "underwriter," they will be subject to the
prospectus delivery requirements of Section 154 of the Securities Act of 1933.
In conjunction with sales to or through brokers, dealers or agents, our
stockholders may agree to indemnify such brokers, dealers or agents against
liabilities arising under the Securities Act of 1933. We do not know of any
existing arrangements between our stockholders and any other stockholder,
broker, dealer, underwriter or agent relating to the sale or distribution of our
common stock.
In addition to selling their common stock under this prospectus, our
stockholders may:
<PAGE>
20
transfer their common stock in other ways not involving market makers
or established trading markets, including by gift, distribution or
other transfer; or
sell their common stock under Rule 144 of the Securities Act of 1933,
if the transaction meets the requirements of Rule 144.
We have advised our stockholders that, during the time each is engaged in
distribution of their common stock, each must comply with Rule 10b-5 and
Regulation M under the Securities Exchange Act of 1934. They must do all of the
following under those rules:
not engage in any stabilization activity in connection with our
common stock;
furnish each broker who may be offering our common stock on behalf of
our stockholders the number of copies of this prospectus required by
each broker; and
not bid for or purchase any of our common stock or attempt to induce
any person to purchase any of our common stock, other than as
permitted under the Securities Exchange Act of 1934.
Any of our stockholders who may be "affiliated purchasers," as defined in
Regulation M, have been further advised that they must coordinate their sales
under this prospectus with each other and us for the purposes of Regulation M.
To the extent required by the Securities Act of 1933, a supplemental
prospectus will be filed, disclosing:
the name of any such broker-dealers;
the number of securities involved;
the price at which such securities are to be sold;
the commissions paid or discounts or concessions allowed
to such broker-dealers, where applicable;
that such broker-dealers did not conduct any investigation to verify
the information set out in this prospectus, as supplemented; and
other facts material to the transaction.
There is no assurance that any of our stockholders will sell any of our
common stock.
LEGAL PROCEEDINGS
-----------------
On or about June 6, 2000, Snickelways, Inc., a New York corporation, filed
a complaint against MegaMedia in the U.S. District Court for the Southern
District of New York. The case was designated Case No. 00 Civ. 4226.
The complaint stems from a Web Site Development Agreement that we entered
into with Snickelways on December 1, 1999. Under the agreement, Snickelways
agreed to develop our web site. The complaint sought damages of $138,784.66,
plus interest and costs, including attorneys' fees, and an injunction against
our further use of our web site, based on our alleged failure to pay for
Snickelways' development services. We are currently preparing an answer and
counterclaim in which we will argue that Snickelways' product is unuasable and
never has been used by MegaMedia. We plan to seek as yet unspecified damages for
Snickelways' failure to develop a usable web site for us.
Other than the Snickelways litigation, MegaMedia is not a party to, nor is
it aware of, any legal proceedings against it.
<PAGE>
21
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
------------------------------------------------------------
The following table sets forth the names of all of our current directors
and executive officers.
<TABLE>
<CAPTION>
DATE OF
APPOINT-
NAME MENT AGE POSITION
---- ---- --- --------
<S> <C> <C> <C>
William A. Mobley, Jr........ 6/99 37 Chairman of the Board
7/00 Chief Technology Officer
Hon. Myron E. Tillman........ 4/00 67 Director
David A. Gust................ 1/00 40 Chief Executive Officer
7/00 Director
7/00 President
Stephen H. Noble, III........ 2/00 38 Chief Financial Officer
4/00 Vice President
7/00 Secretary/Treasurer
</TABLE>
All directors serve until the next annual meeting of stockholders and until
their successors are duly elected and qualified. MegaMedia's officers serve at
the pleasure of the Board of Directors. Directors receive $1,000 for each
meeting attended. In addition, each director is granted options for 2,500 shares
of stock for each year or partial year that he or she serves. As of December 31,
1999, we had not paid any director, nor had we granted any options to directors.
However, on January 5, 2000, we entered into a Stock Option Agreement with Mr.
Mobley. We granted to Mr. Mobley options to purchase 177,841 "unregistered" and
"restricted" shares of our common stock at a price of $2.00 per share. The
options will expire at 5:00 p.m., Eastern Standard Time, on January 5, 2009.
Business Experience.
--------------------
The following summarizes the business experience during the past five years
of each of our directors and executive officers.
William A. Mobley, Jr., age 37, has served as our Chairman of the Board and
Chief Technology Officer since June, 1999 and July, 2000, respectively. Prior to
his employment with MegaMedia, Mr. Mobley was the founder of World Commerce
Online, Inc., a publicly-traded company that develops global commercial networks
and e-commerce solutions. He served as its President and Chief Executive Officer
from November, 1993, to April, 1999.
<PAGE>
23
The Hon. Myron E. Tillman is 67 years of age. He has served as a Director
of MegaMedia since April 2000. Mr. Tillman also serves as corporate counsel to
Noble House of Boston, a public relations firm. He has held that position since
January, 2000. He also is corporate counsel to and a director of Chaos Holdings,
Inc., a publicly-traded fashion accessory firm and has served in that capacity
since January, 2000. From January, 1985, to January, 1995, Mr. Tillman was a New
York Supreme Court Justice. From January, 1973, to January, 1981, he served as a
Surrogate and Circuit Court Judge in New York State. Mr. Tillman was in private
legal practice with Tillman, Roberts & Purphe from 1962 to 1973 in Corning, New
York. He practiced with Tillman & Roby, of Rochester, New York, from January,
1995, to January, 1999. From January l, 1996, to December 31, 1999, he was also
President and Chief Executive Officer of IGG Holdings, Inc., of Tampa, Florida.
IGG Holdings was involved in the golf industry.
David A. Gust, age 40, has served as MegaMedia's Chief Executive Officer
and President since January, 2000 and July, 2000, respectively. He has also
served as a director since July, 2000. From July, 1996, to December, 1999, he
served as Vice President of Marketing and New Ventures for Hard Rock Cafe
International, Inc., a restaurant, entertainment and leisure company. Prior to
his tenure at Hard Rock Cafe, Mr. Gust spent 13 years in various executive
capacities for the Walt Disney Company.
Stephen H. Noble, III, age 38, has served as MegaMedia's Chief Financial
Officer since February, 2000. He was elected Vice President in April, 2000, and
has been our Secretary/Treasurer since July, 2000. From June, 1999, to February,
2000, he served as an independent consultant to Lasergate Systems, Inc., where
he directed the merger of that company into Tickets.com, Inc., a publicly-traded
Internet-based event and venue ticketing services company. From January, 1995,
to April, 1999, Mr. Noble was employed by A.L. Williams, Jr., where he served in
various roles, including Chief Financial Officer of the Tampa Bay Lightning of
the National Hockey League and The Ice Palace Arena in Tampa, Florida. He also
served as Senior Vice President and Controller for a local franchise of the
Canadian Football League. Prior to 1995, Mr. Noble was a principal of Noble &
Associates, CPA's, P.C., a full-service accounting and management consulting
practice serving primarily large, privately-held companies.
Employees.
----------
As of March 31, 2000, MegaMedia had 37 employees. Of these, 14 are in
development, 11 are in operations, seven are in sales and marketing and five are
in administration. None of our employees is represented by a labor union and we
believe our relations with our employees are good.
Family Relationships.
---------------------
There are no family relationships between any of our directors or executive
officers.
Involvement in Certain Legal Proceedings.
-----------------------------------------
During the past five years, no present or former director, executive
officer or person nominated to become a director or an executive officer of
MegaMedia:
<PAGE>
24
was a general partner or executive officer of any business against
which any bankruptcy petition was filed, either at the time of the
bankruptcy or two years prior to that time;
was convicted in a criminal proceeding or named subject to a pending
criminal proceeding (excluding traffic violations and other minor
offenses);
was subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of
business, securities or banking activities; or
was found by a court of competent jurisdiction (in a civil action),
the Commission or the Commodity Futures Trading Commission to have
violated a federal or state securities or commodities law, and the
judgment has not been reversed, suspended or vacated.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth, as of May 1, 2000, the number of shares of
common stock that were owned beneficially by: (i) each person whom we know to
beneficially own more than five percent of our common stock; (ii) each director;
(iii) the Named Executive Officers, as defined in "Executive Compensation," and
(iv) all of our directors and executive officers as a group:
<TABLE>
<CAPTION>
AGGREGATE NUMBER OF TOTAL NUMBER OF
SHARES BENEFICIALLY ACQUIRABLE SHARES BENEFICIALLY
OWNED WITHIN 60 DAYS (3) OWNED PERCENTAGE
NAME (1)(2) (A) (B) (COLUMNS (A)+(B)) OF OWNERSHIP
----------- ------------------- ------------------ ----------------- ------------
<S> <C> <C> <C> <C>
NextTraffic, Inc. (4) 3,250,000 -0- 3,250,000 22.82%
100 S. Orange Avenue
Suite 1000
Orlando, Florida 32801
William A. Mobley, Jr. 1,986,500(5) 177,841(6) 2,164,341 13.95%
John P. Chambers 100,000 -0- 100,000 *
David A. Gust -0- (7) -0- -0- -0-
Hon. Myron E. Tillman -0- -0- -0- -0-
Steven H. Noble, III -0- (8) -0- -0- -0-
All directors and
executive officers
as a group 5,336,500 177,841 5,514,341 36.77%
------------------------------------------------------------------------------------------------
</TABLE>
* Less than one percent.
(1) Except as otherwise noted, and subject to community property laws
where applicable, each person named in the table has sole voting
and investment power with respect to all securities owned by such
person.
(2) Unless otherwise noted, the address of each person or entity
listed is MegaMedia Networks, Inc., 57 West Pine Street,
Orlando, Florida 32801.
<PAGE>
25
(3) Reflects the number of shares that could be purchased by the
holder by exercise of options granted pursuant to stock option
agreements dated January 5, 2000.
(4) William A. Mobley, Jr. is a principal stockholder, and
director of NextTraffic, Inc.
(5) Includes (i) 500,000 shares of common stock owned by Mobley
Investments Ltd., a limited partnership in which Mr. Mobley
serves as Managing Member of the General Partner of the limited
partnership, (ii) 1,000,000 shares of common stock owned by
Mobley Family Ltd., a limited partnership in which Mr. Mobley
serves as President of the General Partner of the limited
partnership, and (iii) 486,511 shares of common stock which Mr.
Mobley owns jointly with his spouse, Michelle M. Mobley.
Excludes the 3,250,000 shares of common stock owned by
NextTraffic, Inc., as Mr. Mobley disclaims beneficial ownership
of such shares.
(6) Represents shares of common stock deposited into an escrow account
established by MegaMedia and certain of its stockholders, under
which the stockholders who deposited the shares into escrow may
reacquire the shares pursuant to options with an exercise price of
$2.00 per share. The options expire on January 5, 2009 and are
exercisable in full commencing on January 5, 2000.
(7) A total of 250,000 shares are held in escrow until Mr. Gust meets
certain conditions. See the heading "Employment and Consulting
Agreements" of the caption "Executive Compensation" of this
prospectus.
(8) A total of 150,000 shares are held in escrow until Mr. Noble meets
certain conditions. See the heading "Employment and Consulting
Agreements" of the caption "Executive Compensation" of this
prospectus.
Changes in Control.
-------------------
On December 29, 1999, five of our stockholders executed an Escrow Agreement
with Christopher P. Flannery, Esq. Under the Escrow Agreement, those
stockholders transferred to Mr. Flannery as escrow agent a total of 711,365
shares of our common stock for re-issuance to employees who are eligible for the
issuance of stock. Management does not believe that this arrangement will result
in a change in control of MegaMedia.
DESCRIPTION OF SECURITIES
-------------------------
MegaMedia has the authority to issue 50,000,000 shares of one cent ($0.01)
par value common voting stock. The holders of our common stock are entitled to
one vote per share on each matter submitted to a vote at a meeting of
stockholders. The shares of common stock do not carry cumulative voting rights
in the election of directors.
Our stockholders have no pre-emptive rights to acquire additional shares of
common stock or other securities. The common stock is not subject to redemption
rights and carries no subscription or conversion rights. In the event of
liquidation of MegaMedia, the shares of common stock are entitled to share
equally in corporate assets after satisfaction of all liabilities. All shares of
the common stock now outstanding are fully paid and non-assessable.
Our Certificate of Incorporation permits the payment of dividends to our
common stock holders in accordance with the Delaware General Corporation
<PAGE>
26
Law, when declared by the Board of Directors. Article X of our Bylaws also
authorizes the Board of Directors to declare dividends as provided by our
Certificate of Incorporation and Bylaws.
The common stock holders are not personally liable for the payment of our
debts.
There is currently no public market for our shares of common stock. If any
public market does develop, they will probably be deemed to be "penny stock" as
defined in Rule 3a51-1 of the Securities and Exchange Commission. This
designation may adversely affect the development of any public market for our
common stock or, if such a market develops, its continuation. Broker-dealers are
required to personally determine whether an investment in "penny stock" is
suitable for customers.
Penny stocks are securities:
o with a price of less than five dollars per share;
o that are not traded on a "recognized" national exchange;
o whose prices are not quoted on the NASDAQ automated quotation
system (NASDAQ-listed stocks must still meet the first requirement
above); or
o of an issuer with net tangible assets less than $2,000,000, if
the issuer has been in continuous operation for at least three
years, or $5,000,000, if in continuous operation for less than
three years, or with average annual revenues of less than
$6,000,000 for the last three years.
Section 15(g) of the 1934 Act, and Rule 15g-2 of the Securities and
Exchange Commission require broker-dealers dealing in penny stocks to provide
potential investors with a document disclosing the risks of penny stocks and to
obtain a manually signed and dated written receipt of the document before
effecting any transaction in a penny stock for the investor's account. Potential
investors in our common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be "penny stock."
Rule 15g-9 of the Securities and Exchange Commission requires
broker-dealers in penny stocks to approve the account of any investor for
transactions in such stocks before selling any penny stock to that investor.
This procedure requires the broker-dealer to:
o obtain from the investor information concerning his or her
financial situation, investment experience and investment
objectives;
o reasonably determine, based on that information, that
transactions in penny stocks are suitable for the investor and
that the investor has sufficient knowledge and experience as
to be reasonably capable of evaluating the risks of penny
stock transactions;
<PAGE>
27
o provide the investor with a written statement setting forth the
basis on which the broker-dealer made that determination; and
o receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the
investor's financial situation, investment experience and
investment objectives.
Compliance with these requirements may make it more difficult for
purchasers of our common stock to resell their shares to third parties or to
otherwise dispose of them.
Of the 14,214,356 shares of our common stock that were issued and
outstanding on June 13, 2000, 11,583,101 shares are "restricted," and
approximately 79,005 of these "restricted" shares are currently eligible for
resale under Rule 144 of the Securities and Exchange Commission. The remaining
shares will become available for resale under Rule 144 on or before June 1,
2001. Our registration statement on Form SB-2, of which this prospectus is a
part, provides for the registration of these shares of "restricted" stock, in
addition to shares that we have issued since that date. We have mailed to our
stockholders a lock-up agreement under which they would agree not to sell,
contract to sell, loan, pledge or grant any rights with respect to our common
stock for a period of one year. However, none of our stockholders has yet
executed the lock-up agreement and they are not obligated to do so. The future
sale of these shares may adversely affect on any market that may develop for our
common stock.
MegaMedia is also authorized to issue 1,000,000 shares of preferred stock
with a par value of one cent ($0.01) per share. Our Board of Directors has the
authority to designate the voting rights, preferences and limitations of the
preferred stock. As of the date of this prospectus, our Board of Directors has
not issued any shares of preferred stock or designated its rights, preferences
and limitations.
INTEREST OF NAMED EXPERTS AND COUNSEL
-------------------------------------
Our financial statements as of December 31, 2000, have been included herein
in reliance on the report of Parks, Tschopp, Whitcomb & Orr, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of that firm as experts in accounting and auditing.
We have not hired any expert or counsel on a contingent basis. No expert or
counsel will receive a direct or indirect interest in MegaMedia, and no such
person was a promoter, underwriter, voting trustee, director, officer or
employee of MegaMedia.
Branden T. Burningham, Esq., who assisted us with the preparation of this
prospectus and the registration statement of which it is a part, is the son of
Leonard W. Burningham, Esq. The elder Mr. Burningham beneficially owns 50,000 of
the shares that are covered by our registration statement. The younger Mr.
Burningham does not beneficially own any shares of our common stock.
<PAGE>
28
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
-----------
Under the Delaware General Corporation Law, a corporation has the power to
indemnify any person who is made a party to any civil, criminal, administrative
or investigative proceeding, other than an action by or in the right of the
corporation, by reason of the fact that such person was a director, officer,
employee or agent of the corporation. This indemnification power applies to
expenses, including reasonable attorneys' fees, judgments, fines and amounts
paid in settlement of any such actions. However, in any criminal proceeding, the
indemnified person shall have had no reason to believe the conduct committed was
unlawful. Article VIII of our Bylaws contains similar indemnification language.
Article 10 of our Certificate of Incorporation, as amended, eliminates
personal liability of our directors to the fullest extent of Section 102(b)(7)
of the Delaware General Corporation Law. Under that section, a company's
Certificate of Incorporation may contain a provision eliminating or limiting the
personal liability of a director to a corporation or its stockholders for
monetary damages for breach of his or her fiduciary duty as a director. However,
such a provision may not eliminate or limit a director's liability for:
any breach of his or her duty of loyalty;
acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
the unlawful payment of a dividend or any unlawful stock purchase
or redemption; or
any transaction from which the director derived an improper
personal benefit.
Article 11 of our Certificate of Incorporation, as amended, requires
MegaMedia to indemnify all persons that it has the power to indemnify under
applicable provisions of the Delaware General Corporation Law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
MegaMedia pursuant to the foregoing provisions, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
DESCRIPTION OF BUSINESS
-----------------------
General.
--------
MegaMedia is a global Internet broadcast company. We specialize in
"on-demand" delivery of entertainment content through our portal site at
www.megachannels.com.
On January 7, 2000, we entered into an Internet Traffic Agreement with
NextTraffic, Inc., a Delaware corporation. NextTraffic is an aggregator of
Internet traffic. It provides its clients with internet visitors to its clients'
web sites.
<PAGE>
29
Under the agreement, NextTraffic agreed to supply us with two million
visitors to our web site each day. The number of visitors is to be verified
through independent audit. In exchange for this traffic flow, we agreed to pay
NextTraffic 25% of all revenue from purchases of our services that are made by
visitors supplied by NextTraffic. Our agreement is for a term of three calendar
years.
NextTraffic's visitors are adults over 18. They have credit cards and have
a history of using their credit cards for electronic transaction processing on
the Internet. NextTraffic acts as a "collection conduit" of traffic from high
profile Internet websites from around the world.
Our Chairman of the Board and Chief Technology Officer, William A. Mobley,
Jr., is also a principal stockholder of NextTraffic. See the caption "Certain
Relationships and Related Transactions" of this prospectus.
We have entered into strategic alliances with AT&T, Digex, Inc.; Sprint
Group; Qwest Communications International, Inc.; UUNET/MCI and others to provide
global bandwidth and hosting services to deliver our signal to Internet users.
The service providers collectively have the largest bandwidth capacities in the
United States. MegaMedia will depend upon the high level of technical services
of these service providers. If we were to lose those services, our business
would be severely affected and we would have to find alternative bandwidth.
However, we believe that other adequate bandwidth sources would be available if
these contracts were terminated or impaired.
History.
--------
Our predecessor corporation was organized under the laws of the State of
Utah on March 26, 1985 under the name "Ace Investments, Inc." Ace Investments
was founded to seek out and acquire suitable acquisition or merger targets. Ace
Investments' initial securities offering was a "blind-pool" or "blank check"
offering.
On August 28, 1986, Ace Investments amended its Articles of Incorporation
to change its name to "Matlock Communications, Inc." and to change its
authorized capital to 100,000,000 shares of one mill ($.001) par value common
stock.
On May 16, 1989, our predecessor amended its Articles of Incorporation to
change its name to "Persimmon Corporation" and to change its authorized capital
to 100,000,000 shares of $.015 par value common stock and 10,000,000 shares of
$.001 par value preferred stock. It also reverse split its issued and
outstanding common stock in the ratio of one share for 15.
MegaMedia was incorporated in the State of Delaware on December 20, 1991,
under the name "Amalgamated Entertainment, Inc." The sole purpose of the
incorporation was to change Persimmon's domicile to the State of Delaware.
<PAGE>
30
Persimmon merged into Amalgamated Entertainment on January 28, 1992.
Amalgamated Entertainment was the surviving corporation.
On April 6, 1999, Amalgamated Entertainment reverse split its outstanding
common stock in the ratio of one share for 30.
Amalgamated Entertainment entered into an agreement with Duane S. Jenson in
October, 1999. Under the agreement, Amalgamated Entertainment purchased a 2%
ownership interest in certain yearling horses in which Mr. Jenson had purchased
an interest. The horses were purchased for the purpose of "pinhooking," or
training them for subsequent resale as two year old race horses.
On October 6, 1999, Amalgamated Entertainment entered into an Agreement and
Plan of Reorganization with MegaMedia Networks, Inc., a Nevada corporation, and
all of MegaMedia-Nevada's stockholders. Under the agreement, Amalgamated
Entertainment acquired all of the outstanding securities of MegaMedia-Nevada in
exchange for 10,461,367 shares of Amalgamated Entertainment common stock. As
part of the agreement, the former directors and executive officers of
Amalgamated Entertainment resigned and the directors and executive officers of
MegaMedia-Nevada took their places. On October 26, 1999, we filed with the
Securities and Exchange Commission a Current Report on Form 8-K, which discussed
the terms of this reorganization. The Current Report is available for your
review on the Commission's web site: www.sec.gov.
Amalgamated Entertainment effected a 2.5-for-one forward stock split on
September 13, 1999.
Unless otherwise indicated, all share information in this prospectus takes
into account the stock splits referred to above.
On November 29, 1999, Amalgamated Entertainment amended its Certificate of
Incorporation to reflect its current name, "MegaMedia Networks, Inc.," and to
increase its authorized common stock to 50,000,000 shares of common stock, $.01
par value per share.
We executed a Purchase and Sale of Assets Agreement on April 14, 2000.
Under that agreement, our wholly-owned subsidiary, Titan Hosting, Inc., a
Delaware corporation, agreed to purchase certain equipment leases and agreements
and customer contracts of City-Guide ISP, Inc., a Florida corporation, in
exchange for:
o $1,000,000 cash;
o a $720,000 promissory note, payable at $30,000 per month,
including interest, and convertible into shares of our common
stock at $3.00 per share; and
o 200,000 "unregistered" and "restricted" shares of our common
stock.
<PAGE>
31
Titan granted to City-Guide a security interest in certain of the assets
that it acquired under the agreement. MegaMedia also provided an unconditional
guarantee of Titan's payment obligations and granted City- Guide's stockholders
piggyback registration rights for the 200,000 shares that were issued under the
agreement.
Under the agreement, City-Guide also agreed to sublease to Titan
approximately 3,586 square feet of office space located in Tampa, Florida,
subject to the landlord's consent. Titan also agreed to assume City-Guide's
liabilities under the purchased leases.
On April 27, 2000, we filed with the Securities and Exchange Commission a
Current Report on Form 8-K disclosing the material terms of the Purchase and
Sale of Assets Agreement and the related agreements. This Current Report is
available for review on the Commission's web site.
Principal Products or Services and Their Markets.
-------------------------------------------------
The Internet has grown rapidly in recent years. This growth has been
spurred by developments such as:
easy-to-use Web browsers;
the availability of inexpensive multimedia personal computers and
Internet access;
the adoption of more robust network architectures; and
the emergence of compelling Web-based content and commerce
applications.
The broad acceptance of the Internet Protocol standard has also led to the
emergence of intranets, or closed systems of interconnected personal computers,
and the development of a wide range of non-PC devices that let users access the
Internet and intranets.
The accelerated pace of technological innovation has helped the Internet
rapidly become a mass medium. This innovation has expanded the Web's
capabilities and improved users' experiences. The Internet has evolved from a
mass of static, text-oriented Web pages and e-mail services to a much richer
medium that delivers graphical, interactive and multimedia content. Before the
development of streaming media technologies, users could not play back audio and
video clips until all of the content was downloaded. As a result, live Internet
broadcasts were not possible and archived clips were cumbersome to download and
use.
The development of streaming media products by companies such as Microsoft
and RealNetworks allows the simultaneous transmission and playback, or "Internet
broadcast," of continuous "streams" of audio and video content over the Internet
and intranets. These technologies have can deliver audio and video over widely
used 28.8 kilobits per second narrow bandwidth modems. They can also take
advantage of higher speed access that is expected to be provided by xDSL, cable
modems and other emerging broadband technologies.
<PAGE>
32
Broadcasting audio and video content over the Internet offers certain
opportunities that traditional media can not generally provide. Currently
available analog technology and government regulations limit the ability of
radio and television stations to broadcast beyond certain geographic areas.
Radios and televisions are not widely used in office buildings and other
workplaces, where Internet access has become commonplace. Traditional business
communication tools such as audio conferencing and videoconferencing can be
costly, non-targeted and inconvenient. In addition, traditional broadcasters are
limited in their ability to measure or identify in real time the listeners or
viewers of a program. The Internet allows users to target streaming media
content to a geographically dispersed audience of customers, suppliers,
employees and stockholders at relatively low costs. Internet users can interact
with the broadcast content by responding to online surveys, voting in polls and
obtaining additional information. Internet broadcasters can also provide highly
specific information about a program's audience to content providers,
advertisers and users of Internet business services. The Internet is now
accepted as a business tool. This has created rapidly growing opportunities in
Web-based advertising and business service offerings.
We believe that Internet broadcasters must overcome several challenges
before Internet broadcasting will be effective. Broadcasters must:
aggregate diverse and compelling content;
scale Internet broadcasts from small to large audiences;
use new transmission and streaming technologies in a
timely manner; and
provide multimedia advertisements and services.
In order to aggregate content, Internet broadcasters must rapidly identify
and secure licensing opportunities by showing content providers that they have
broad-based distribution and can deliver associated traffic. Successful Internet
broadcasters serving a large number of simultaneous users around the clock also
need to design, develop and integrate complex network elements, including
scalable bandwidth, streaming licenses, equipment and technical expertise. The
rapid evolution of streaming media requires Internet broadcasters to support
multiple vendors. Few companies have made this investment. We believe that a
successful Internet broadcaster must develop a well-branded, highly-trafficked
Web portal and destination which offers:
o compelling content;
o a network capable of streaming audio and video
programming to large audiences 24 hours a day, seven days a week;
and
o an organization that can deliver quality broadcasting services to
advertisers, businesses and content providers.
<PAGE>
33
MegaMedia believes it has established a significant brand for its
broadcasts and services on the Internet. It has broad content, network
infrastructure, audience size and distribution capabilities. In addition, our
websites provide an attractive platform for advertisers to target specific users
with rich, compelling advertising.
MegaChannels delivers entertainment on many levels to suit many consumers:
FEATURE FILMS are available in subscription plans, but are always
available on demand. The spectrum of available movies will range from
major studio blockbusters to independent low-budget "B" movies. We
currently have many feature films and intend to expand our film
selection. We are negotiating strategic arrangements with several
major studios to deliver a strong line-up of movies that consumers
recognize and want to see. We are also developing contracts with
independent producers and wholesalers. Under these contracts, we will
deliver second and third-tier movies on a revenue-sharing basis. Our
presentation will also have wrap-around features; context-specific
merchandising; chat; additional information; and targeted advertising.
TELEVISION content currently includes a sampling of well-known classic
series and sitcoms. MegaMedia intends to expand that repertoire by
adding made-for-TV movies, game shows, and soap operas as well as
current hit shows. MegaChannels' on-demand format lets consumers
spontaneously select their viewing without being tied to a schedule,
or having to plan ahead to record their choices. Featured through
subscription service on-demand, we secure television properties on a
revenue-sharing and modified television syndication basis.
LIVE EVENTS currently include some sports events. In addition to
expanding coverage of sports and concert events, MegaMedia plans to
add awards, Las Vegas shows, Broadway performances, conferences and
other perishable content. We will archive all live events for future
on-demand access.
MADE FOR THE NET content is also available at MegaChannels. This
content includes animation, cartoons and Flash. In addition, we intend
to include shorts and interactive games. All of these products are
designed to add unprecedented levels of user interaction.
FREE CONTENT is listed in directory form to provide users with the a
compelling selection of entertainment offerings. These selections
create a link to the content provider site within a MegaChannels
formatted page.
Distribution Methods of the Products or Services.
-------------------------------------------------
RETAIL
As part of its online entertainment services, MegaMedia will provide its
visitors, subscribers, and members with various product and merchandising
offerings. By establishing strategic alliances with online retailers, we will
participate in revenues generated from consumer purchasing without the
associated expenses of establishing inventory, customer service centers, and
distribution systems.
<PAGE>
34
MARKETING AND SALES
We market to consumers through traditional advertising, publicity and
promotional activities as well as through our Internet Traffic Agreement with
NextTraffic.
ADVERTISING
We have focused our advertising strategies on banner exchange programs
intended to drive traffic to our site. We rely on these programs to distribute
our brand across a broad network of referring sites and to generate
cost-effective leads for subscription sales. Our contract with NextTraffic
provides for prominent placement of advertising in key sites.
PROMOTIONS AND PUBLICITY
Our strategy is to create noteworthy promotional events and activities that
can be widely publicized. These activities include:
o movie premieres;
o sweepstakes;
o contests;
o live events;
o celebrity-focused events; and
o other promotions.
These events target specific audiences and are designed to increase
awareness of MegaMedia and to stimulate users to try our web site. We use
internal promotions once the customer has arrived on-site.
<PAGE>
35
CUSTOMERS
---------
MegaMedia welcomes Internet users from around the world. Our MegaChannels
site is an entertainment portal providing one-stop access to entertainment from
all corners of the world. Our guests are technologically knowledgeable and
demographically attractive. MegaChannels' primary audience is predominantly
male, aged 18-49, with a history of online credit card purchases.
Competitive Business Conditions.
--------------------------------
For a discussion of the competitive risks that we face, see the Risk Factor
"The Highly Competitive Nature of the Internet Industry May Limit Our Chances of
Success" of this prospectus.
Sources and Availability of Raw Materials.
------------------------------------------
The Internet industry does not typically depend on raw materials in the
sense that a manufacturer is dependent upon raw materials used in the production
of its products. Our most vital "raw materials" are our computers and our
intellectual property. See the caption "Description of Property," of this
prospectus.
Dependence on One or a Few Major Customers.
-------------------------------------------
MegaMedia does not depend on one or a few major customers. Almost any
person meeting our customer profile is a potential customer.
Need for Governmental Approval of Principal Products or Services.
-----------------------------------------------------------------
We are not aware of any law or regulation that would require government
approval of any of our products or services. However, see the Risk Factor "Any
Future Governmental Regulation of the Internet May Hurt Our Operations," of this
prospectus.
Effect of Existing or Probable Governmental Regulations on the
Business.
---------
See the Risk Factor "Any Future Governmental Regulation of the Internet May
Hurt Our Operations," of this prospectus.
Research and Development.
-------------------------
Product development is a constant, ongoing process for MegaMedia, as it is
in the industry generally. We are developing next-generation user interfaces,
site navigation, transaction processing and video delivery techniques. We
continually evaluate site performance with a view toward future development
activities. We conduct product development both in-house and through third party
contractors.
<PAGE>
36
Costs and Effects of Compliance with Environmental Laws.
--------------------------------------------------------
Management does not believe that compliance with environmental laws will
require significant spending.
Number of Employees.
--------------------
As of March 31, 2000, we had 37 employees. Of these, 14 are in development;
11 are in operations; seven are in sales and marketing, and five are in
administration. None of our employees is represented by a labor union and
MegaMedia believes its relations with its employees are good.
Reports to Security Holders.
----------------------------
We can not assure you that we will ever get approval to trade our
securities on the OTC Bulletin Board. If we do get such approval, the National
Association of Securities Dealers, Inc. requires that all issuers maintaining
quotations of their securities on the OTC Bulletin Board file periodic reports
under the Securities Exchange Act of 1934. MegaMedia does file periodic reports
with the Securities and Exchange Commission under Section 15(d) of the 1934 Act.
The public may read and copy any materials that we file with the Securities
and Exchange Commission at the Commission's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. The Commission maintains an Internet site that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the Commission. The address of that site is
http://www.sec.gov.
We intend to give our stockholders annual reports containing financial
statements audited and reported upon by our independent accounting firm and such
other periodic reports as we may determine to be appropriate or as may be
required by law.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
You should read the following discussion of our plan of operations in
conjunction with our financial statements, including the notes thereto,
appearing elsewhere in this prospectus. This discussion contains forward looking
statements that involve risks and uncertainties. Our actual results may differ
materially from the results discussed in the forward looking statements. Factors
discussed below and in other sections of this prospectus might cause such a
difference.
<PAGE>
37
OVERVIEW
--------
MegaMedia launched its site in late March, 2000. Additional upgraded
releases of the site will follow in 2000.
Through various strategic marketing alliances, we expect that our
MegaChannels website will welcome a significant volume of demographically
attractive customers daily.
To date, we have incurred substantial costs to develop our technology. We
will continue to incur costs to develop our website, acquire content, build
brand recognition and grow our business. We may also incur significant
additional costs with the possible acquisitions of other businesses and
technologies. These costs may not correspond with a meaningful increase in
short-term revenues.
Over the next 12 months, Megamedia is focused on:
o finalizing strategic relationships for additional content;
o improving website appeal and utility;
o increasing advertising rates;
o developing strategic alliance partners; and
o extending network infrastructure to key foreign territories.
Management is currently building staff to accommodate the anticipated
growth. We will pursue content through acquisitions, partnerships, marketing and
distribution agreements, and license agreements with studios and independent
owners. We are continually developing our site. We incorporate consumer
feedback, site performance and technical development to refine and improve the
consumer experience. Improved sales tools, customer data history and an expanded
sales force are the focus of our efforts to drive higher advertising rates.
We plan to develop strategic partnerships with key suppliers, consumer
marketers and others. The goal is to lower costs, increase revenue and bolster
brand stature. We will continue to develop cost-effective network capacity in
order to ensure quality delivery of content to the consumer.
During the next 12 months, MegaMedia plans to spend approximately $500,000
on web site enhancements.
Since October 6, 1999, the date of our reorganization, we have hired 37
employees. We expect to hire approximately 20 additional employees during the
next 12 months.
We face many risks and uncertainties over the next 12 months. See the
caption "Risk Factors" of this prospectus.
<PAGE>
38
Results of Operations.
----------------------
Comparison of Fiscal Year End 1999 to Fiscal Year End 1998.
-----------------------------------------------------------
REVENUES. Before the calendar year ended December 31, 1999, MegaMedia had
no revenues. We are in the "development" stage and as of December 31, 1999 had
not launched our web site. Therefore, we had no revenues for the year ended
December 31, 1999.
OPERATING EXPENSES. Operating expenses were $865,261 for the year ended
December 31, 1999. These expenses consist primarily of salaries and related
personnel expenses, rent, travel, and general operating expenses. However, as we
expand operations, which we believe is essential to achieving and maintaining
market leadership, we anticipate that operating expenses will increase. In order
to meet our cash requirements, we raised approximately $2,800,000 in private
placements during fiscal 1999.
OTHER INCOME. Other income for the year ended December 31, 1999 was $8,012.
This figure represents interest income earned on overnight deposits.
INCOME TAXES. As of December 31, 1999, we had federal net operating loss
carryforwards of approximately $857,249. This net operating loss can be carried
forward for twenty years to offset future taxable income. Due to the net loss of
$857,249 for the year ended December 31, 1999 we have made no provision for
income taxes.
Comparison of the Three Months Ended June 31, 2000, and 1999.
----------------------------------------------------------------
OVERVIEW. For the second quarter of 2000, we incurred a net loss of
$2,553,000. We were not in operation during the second quarter of 1999, and
therefore only incurred corporate general and administrative costs totaling
$5,311.
SALES. Sales for the second quarter were $395,000. The revenue consists
primarily of advertising revenues and Titan's bandwidth service revenues.
COST OF SALES. Cost of sales for the second quarter of 2000 were $821,000.
These expenses are made up of bandwidth expense, Internet traffic expense and
advertising sales commissions. MegaMedia has an exclusive arrangement with
NextTraffic, Inc., an aggregator of Internet traffic, which acts as a
"collection conduit" of traffic from high profile Internet websites from around
the globe to deliver visitors to our portal. However, we only pay for such
traffic if it is successfully delivered to the MegaChannels.com website.
OPERATING EXPENSES. Operating expenses, which consist primarily of salaries
and related personnel expenses, rent, travel, depreciation, amortization and
marketing expenses, were $2,125,000 for the second quarter of 2000.
<PAGE>
39
OTHER INCOME AND EXPENSES. Other expense for the three months ended June
30, 2000 was $2,000, representing interest income earned on overnight deposits
of $12,000, offset by interest expense of $10,000.
Comparison of the Six Months Ended June 30, 2000 and 1999.
----------------------------------------------------------
OVERVIEW. For the first six months of 2000, MegaMedia incurred a net loss
of $4,438,000. However, we were in the development stage until March 25, 2000,
when we launched our website, and Titan had no operations until the purchase of
the City-Guide assets on April 14, 2000. MegaMedia was not in operation during
the first six months of 1999, and therefore only incurred corporate general and
administrative costs totaling $5,311.
SALES. Sales for the first six months of 2000 were $439,000, however, we
did not begin incurring revenue until March 25, 2000 when we launched our
website, and Titan did not become active until April 14, 2000, as discussed
above. The revenue consists primarily of advertising revenues and Titan's
bandwidth service revenues.
COST OF SALES. Cost of sales for the first six months of 2000 were
$1,301,000. These expenses are made up of bandwidth expense, Internet traffic
expense and advertising sales commissions. Although MegaMedia did not officially
launch it website until March 25, 2000, the site was operational during February
and March. Therefore, we were incurring expense for both bandwidth and Internet
traffic during this time. We have an exclusive arrangement with NextTraffic,
Inc., and aggregator of Internet traffic, which acts as a "collection conduit"
of traffic from high profile Internet websites from around the globe to deliver
visitors to our portal. However, we only pay for such traffic if it is
successfully delivered to the MegaChannels.com website.
OPERATING EXPENSES. Operating expenses, which consist primarly of salaries
and related personnel expenses, rent, travel, depreciation, amortization and
marketing expenses, were $3,603,000 for the first six months of 2000.
OTHER INCOME AND EXPENSES. Other income for the six months ended June 30,
2000 was $28,000, representing interest income earned on overnight deposits of
$40,000, offset by interest expense of $12,000.
INCOME TAXES. For the six months ended June 30, 2000, Megamedia had an
operating loss. Therefore, there was no provision made for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements have been significant. Since its inception,
MegaMedia has financed development and operations through the sale of stock in
the form of private placements. As of August 14, 2000, we had raised a total of
approximately $5,938,000, primarily in the form of three private placement
offerings since May 27, 1999. In addition, beginning in the second quarter of
2000, MegaMedia has financed its operations through the extension of credit from
The Orlando Group Downtown LLC. At August 14, 2000, they have extended us
$650,000. We scaled back our operations during the second quarter of 2000 in an
effort to conserve cash, without jeopardizing our long-term growth and ability
to attain profitable operations. In addition, we continue to pursue additional
capital to fund our working capital, capital expenditure, and debt service
requirements. However, there can be no assurance that we will be able to obtain
additional funding through the issuance of additional equity securities through
private placement offerings, the continued extension of credit from The Orlando
Group Downtown LLC, or through other means, or that we will be able to continue
our operations as a going concern.
<PAGE>
40
DESCRIPTION OF PROPERTY
-----------------------
All of our operations are housed in approximately 10,000 square feet of
office space in Orlando, Florida. We lease our space for approximately $11,808
per month. The lease expires on May 30, 2002, but we have an option to extend
the lease for an additional two years. Our lease obligations are personally
guaranteed by William A. Mobley, Jr., the Chairman of the Board. Mr. Mobley is
also a principal stockholder of MegaMedia.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Mr. Mobley has personally guaranteed our obligations under our office
lease. See the caption "Description of Property" of this prospectus.
On January 7, 2000, we entered into an Internet Traffic Agreement with
NextTraffic, Inc. Mr. Mobley is a director and a principal stockholder of
NextTraffic. Under the agreement, NextTraffic has agreed to supply our web site
with up to two million visitors per day. We have agreed to pay NextTraffic 25%
of all revenue from purchases of our services that are made by visitors supplied
by NextTraffic.
<PAGE>
41
Also on January 7, 2000, we executed a Product Development Agreement with
Nextelligence, Inc. The agreement requires us to use Nextelligence as our
exclusive provider of portal and software platform development services. Mr.
Mobley controls Nextelligence.
Harry Timmons, a former member of our Board of Directors, is the President
of NextTraffic.
In January, 2000, we entered into a Consulting Agreement with Mr. Mobley.
Under the agreement, we agreed to pay Mr. Mobley $200,000 per year, payable
bi-weekly in arrears. We terminated the agreement in June, 2000 and appointed
Mr. Mobley Chief Technical Officer. Effective July 16, 2000, we executed an
employment agreement with Mr. Mobley under which we agreed to pay him a yearly
salary of $150,000. See the heading "Employment and Consulting Agreements" of
the caption "Executive Compensations."
On April 14, 2000, we entered into a Purchase and Sale of Assets Agreement
with Titan Hosting; City-Guide; and the stockholders of City-Guide, as discussed
under the heading "History" of the caption "Description of Business" of this
prospectus. At the time of the Purchase and Sale of Assets Agreement, Mark Dolan
was our Secretary and General Counsel and was the Secretary and a principal
stockholder of City-Guide. Mr. Dolan is no longer our General Counsel or
Secretary and, to our knowledge, he is no longer a principal stockholder of
City-Guide.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
Market Information.
-------------------
There is no market for our common stock. We are currently trying to obtain
a trading symbol on the OTC Bulletin Board of the National Association of
Securities Dealers, Inc. We have registered these 5,829,430 shares of our common
stock in an effort to facilitate the NASD's clearance of our filing. However, we
can not assure you that we will succeed in this effort. If we do not succeed,
purchasers of our common stock will have much more difficulty selling their
shares. For a discussion of the shares that are subject to options, see the
captions "Stock Options" and "Stock Option Plan" of this prospectus.
Holders.
--------
As of June 13, 2000, we had approximately 371 stockholders of record. This
figure does not include beneficial owners of common stock held in "nominee" or
"street" name, as we can not accurately estimate the number of these beneficial
owners.
Dividends.
----------
We have not declared any cash dividends on our common stock. We do not
intend to declare dividends in the foreseeable future. There are no material
restrictions limiting, or that are likely to limit, our ability to pay dividends
on our common stock.
<PAGE>
42
EXECUTIVE COMPENSATION
----------------------
The following table sets forth certain summary information about the
compensation paid for each of our last three fiscal years to our Chief Executive
Officer and each of our other executive officers that received compensation of
more than $100,000 during those periods. Each of these officers is called a
"Named Executive Officer." No other executive officers of the Company earned
compensation of more than $100,000 during such periods.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS
--------------------------- ---- ------ ----- -------
<S> <C> <C> <C> <C> <C>
William A. Mobley, Jr. 1999 $ 80,769 (1) $ 0 177,841 (2)
Former Chief Executive Officer 1998 N/A N/A N/A
and President (Currently, Chairman 1997 N/A N/A N/A
of the Board and Chief Tech. Officer)
John P. Chambers 1999 $51,280 (3) $0 100,000(4)
Former Chief Technology Officer 1998 N/A N/A N/A
1997 N/A N/A N/A
</TABLE>
(1) Includes $8,653.86 received by Mr. Mobley for consulting services
rendered to MegaMedia.
(2) Represents an option to purchase 177,841 shares of common stock
granted in December, 1999, pursuant to a stock option agreement, dated
January 5, 2000, between MegaMedia and Mr. Mobley. All 177,841 options
are exercisable at $2.00 per share, beginning January 5, 2000. If Mr.
Mobley dies, any unexercised portion of the options shall be
exercisable by his estate until the option expires.
(3) Mr. Chambers executed an Employment Agreement with MegaMedia-Nevada on
June 24, 1999. The agreement provided for an annual base salary of
$105,000, $51,280 of which was paid in calendar 1999. On May 10, 2000,
we executed a Separation Agreement with Mr. Chambers. Under that
agreement, we agreed to pay Mr. Chambers' salary in full through May
10, 2000, plus an amount equal to two weeks' pay and 15 days' accrued
vacation time, at his current salary.
(3) MegaMedia-Nevada granted to Mr. Chambers options to purchase 100,000
shares of common stock on June 24, 1999. Under the Separation
Agreement with Mr. Chambers, these options were canceled and we agreed
to issue to Mr. Chambers 100,000 "unregistered" and "restricted"
shares of our common stock. See the caption "Security Ownership of
Certain Beneficial Owners and Management" of this prospectus.
(4) Pursuant to his Employment Agreement with MegaMedia-Nevada,
MegaMedia-Nevada issued to Mr. Chambers 100,000 "unregistered" and
"restricted" shares of common stock and options to purchase an
additional 100,000 shares. Under the Separation Agreement with Mr.
Chambers, these options were canceled and he retained ownership of the
100,000 shares of our common stock. See the caption "Security
Ownership of Certain Beneficial Owners and Management" of this
prospectus.
EMPLOYMENT AND CONSULTING AGREEMENTS
------------------------------------
Effective June 24, 1999, MegaMedia-Nevada entered into an employment
agreement with John P. Chambers, Jr. Under the agreement, Mr. Chambers was to
serve as our Chief Technology Officer for a period of two years. On May 10,
2000, we signed a Separation Agreement with Mr. Chambers. Under the Separation
Agreement, Mr. Chambers resigned his position and we agreed to pay him his
salary through May 10, 2000, plus an amount equal to two weeks' pay at his
revised base salary of $160,000, and 15 days' accrued vacation time at his
revised base salary. We also agreed that Mr. Chambers would retain 100,000
"unregistered" and "restricted" shares of our common stock and he agreed to the
cancellation of his options to purchase 100,000 shares.
<PAGE>
43
In January, 2000, we entered into a consulting agreement with William A.
Mobley, Jr., as discussed under the caption "Certain Relationships and Related
Transactions." Under the agreement, Mr. Mobley provided specialized interim
management services related to: (i) product development, advanced technologies,
e-commerce systems and consumer generation tools; (ii) mergers and acquisitions;
and (iii) communication and investor relations. In June, 2000, we terminated the
agreement and appointed Mr. Mobley Chief Technical Officer. Effective July 16,
2000, we entered into an Employment Agreement with Mr. Mobley. The agreement is
effective until January 20, 2001, and provides for us to pay Mr. Mobley a salary
of $150,000 per year.
Also in January, 2000, we executed an employment agreement with David A.
Gust, our Chief Executive Officer and President. Under the agreement, we agreed
to pay Mr. Gust a salary of $190,000 per year. Upon Mr. Gust's payment of
$2,500, we also agreed to issue him 250,000 "unregistered" and "restricted"
shares of our common stock. These shares are held in escrow until the earliest
to occur of the following:
o January 9, 2001;
o Mr. Gust's death;
o Mr. Gust's permanent disability;
o Mr. Gust's termination without cause; or
o a change in control of MegaMedia, as defined in the Employment
Agreement.
Mr. Gust has paid for these shares.
We also executed two stock option agreements with Mr. Gust, as discussed
below.
As part of Mr. Gust's employment arrangement, William A. Mobley, Jr.; Harry
Timmons; NexTraffic, Inc.; David Marshlack; and Mark R. Dolan, Esq., who
collectively owned more than 50% of our outstanding shares, executed a Voting
Agreement under which they agreed to vote for Mr. Gust as a member of our Board
of Directors. The Voting Agreement will remain in effect as long as Mr. Gust is
an employee of MegaMedia. Mr. Gust was elected to the Board of Directors in
July, 2000.
On February 7, 2000, we entered into an Employment Agreement with Stephen
H. Noble, III, our Vice President, Chief Financial Officer and
Secretary/Treasurer. The agreement is for a term of three years. Mr. Noble's
salary is $145,000 per year.
Upon Mr. Noble's payment of $1,500, we also agreed to issue him 150,000
"unregistered" and "restricted" shares of our common stock. These shares are
held in escrow until the earliest to occur of the following:
<PAGE>
44
o February 5, 2001;
o Mr. Noble's death;
o Mr. Noble's permanent disability;
o Mr. Noble's termination without cause; or
o a change in control of MegaMedia, as defined in the Employment
Agreement.
We also granted Mr. Noble options, as discussed below.
On March 1, 2000, we executed an Employment Agreement with our former
President, Paul Turcotte. The agreement provided for Mr. Turcotte to receive a
salary of $275,000 per year. We also agreed to issue to Mr. Turcotte 200,000
"unregistered" and "restricted" shares of our common stock upon receipt of
$2,000. These shares are held in escrow until the earliest to occur of the
following:
o March 1, 2001;
o Mr. Turcotte's death;
o Mr. Turcotte's permanent disability;
o Mr. Turcotte's termination without cause; or
o a change in control of MegaMedia, as defined in the Employment
Agreement.
We also granted Mr. Turcotte options to purchase up to 344,445 shares of
our common stock.
On July 19, 2000, we signed a Separation Agreement under which we agreed
that Mr. Turcotte may keep his 200,000 shares. However, his options have been
canceled.
<PAGE>
45
STOCK OPTIONS
-------------
The following table summarizes all stock options granted in calendar 1999
to the officers listed in the Summary Compensation Table.
<TABLE>
<CAPTION>
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1999
INDIVIDUAL GRANTS
-----------------
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATES OF
NUMBER OF GRANTED STOCK PRICE
SECURITIES TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM (1)
OPTIONS IN FISCAL PRICE EXPIRATION
NAME GRANTED YEAR PER SHARE DATE 5% 10%
---- ------- ---- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
William A.
Mobley, Jr. 177,841(2) 64% $2.00 01/05/09 $293,437 $723,813
John P.
Chambers, Jr. 100,000(3) 36% $2.00 06/24/09 $165,000 $407,000
</TABLE>
(1) These amounts represent hypothetical gains that could be achieved
for the options if exercised at the end of the option term. These
gains are based on assumed rates of stock price appreciation of 5%
and 10% compounded annually from the date the options were granted
to their expiration date. These assumptions are not intended to
forecast future appreciation of our stock price. The potential
realizable value computation does not take into account federal or
state income tax consequences of option exercises or sales of
appreciated stock.
(2) Represents an option to purchase 177,841 shares of common stock
granted in December, 1999, pursuant to a stock option agreement,
dated January 5, 2000, between MegaMedia and Mr. Mobley. All
177,841 options are exercisable at $2.00 per share, beginning
January 5, 2000. If Mr. Mobley dies, any unexercised portion of
the options shall be exercisable by his estate until the option
expires.
(3) MegaMedia-Nevada granted to Mr. Chambers options to purchase
100,000 shares of common stock on June 24, 1999. Under the
Separation Agreement with Mr. Chambers, these options were
canceled and we agreed to issue to Mr. Chambers 100,000
"unregistered" and "restricted" shares of our common stock. See
the caption "Security Ownership of Certain Beneficial Owners and
Management" of this prospectus.
STOCK OPTION PLAN
-----------------
Our Board of Directors has adopted a 2000 Stock Option Plan. We have
reserved 1,500,000 shares of our common stock for issuance under the Plan. Our
Board of Directors, or a committee to be appointed by the Board, is responsible
for determining who will receive options and what the term will be. The exercise
price of the options may not be less than par value or, for incentive stock
options, less than the fair market value of the underlying shares on the date we
grant the option.
To date, we have granted approximately 195,688 options to a total of 26
employees under the Plan. The options begin vesting on the one-year anniversary
of each employee's hiring or, in some, cases, December 31, 2000, whichever
occurs first. They are exercisable at various prices ranging from $2.00 per
share to $5.00 per share. As of the date of this prospectus, none of our
employees have exercised any options.
<PAGE>
46
On January 5, 2000, we executed Stock Option Agreements with the following
entities:
Optionee No. of Shares Termination Date
-------- ------------- ----------------
Mark R. Dolan 11,856 January 5, 2005
Capital Access 237,122 January 5, 2005
Management Group, Inc.
David G. Marshlack 47,424 January 5, 2009
Ameropa Ltd. 237,122 January 5, 2009
Each of these options is exercisable at $2.00 per share.
On January 10, 2000, we entered into two Stock Option Agreements with David
A. Gust. The first agreement grants to Mr. Gust the option to purchase up to
200,000 "unregistered" and "restricted" shares of our common stock at a price of
$3.00 per share. Under the second agreement, Mr. Gust may purchase up to 200,000
"unregistered" and "restricted" shares for $4.50 per share. All options will
vest on the earliest to occur of the following:
o January 9, 2002, if Mr. Gust is still an employee;
o Mr. Gust's termination without cause;
o Mr. Gust's voluntary termination for constructive discharge, as
defined in his Employment Agreement; or
o a change in control of MegaMedia, as defined in the Stock Option
Agreements.
Once the options have vested, Mr. Gust will be able to exercise them for 10
years.
On February 7, 2000, we executed three Stock Option Agreements with Stephen
H. Noble, III. The agreements grant Mr. Noble the option to purchase 150,000
shares; 100,000 shares; and 100,000 shares, respectively. On June 23, 2000, an
amendment to Mr. Noble's Employment Agreement converted the option for 150,000
shares to an outright grant of shares.
The remaining options vest on the earliest of the following to occur:
o February 6, 2002, with respect to the first option; and February
6, 2003, with respect to the second option;
o Mr. Noble's termination without cause, as defined in his
Employment Agreement;
o Mr. Noble's voluntary termination for constructive discharge, as
defined in his employment agreement; or
o a change in control of MegaMedia, as defined in the Stock Option
Agreements.
Once the options have vested, Mr. Noble may exercise the first 100,000
options at $4.50 per share; and the last 100,000 options at $5.00 per
share.
On February 21, 2000, we expected an employment agreement with Kim
Creighton, our Human Resources Specialist. We granted her options to purchase up
to 50,000 "unregistered" and "restricted" shares of common stock. The options
vest on a staggered basis through Frebruary 21, 2003, and are exercisable at
prices ranging from $3.00 to $5.00 per share, for 10 years after vesting.
On May 9, 2000, we executed a Separation Agreement with our former general
counsel and Secretary, Mark R. Dolan, Esq. Under the agreement, Mr. Dolan
retained ownership of 75,000 "unregistered" and "restricted" shares of our
common stock and his option to purchase 75,000 such shares was canceled.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
--------------------
MEGAMEDIA NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
PAGES
<S> <C>
Independent Auditors' Report..........................................F-2
Financial Statements:
Balance Sheet................................................F-3
Statements of Operations.....................................F-4
Statements of Stockholders' Equity...........................F-5
Statement of Cash Flows......................................F-6
Notes to Financial Statements................................F-7
F-1
</TABLE>
<PAGE>
47
The Board of Directors
MegaMedia Networks, Inc.
Orlando, Florida
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of MegaMedia
Networks, Inc. (a development stage company) as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the period of May 27, 1999 (date of inception) through December 31,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MegaMedia
Networks, Inc. as of December 31, 1999, and the results of its operations and
its cash flows for the period of May 27, 1999 (date of inception) through
December 31, 1999, in conformity with generally accepted accounting principles.
/S/ PARKS, TSCHOPP, WHITCOMB & ORR, P.A.
March 20, 2000
Maitland, Florida
F-2
<PAGE>
48
<TABLE>
<CAPTION>
MEGAMEDIA NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1999
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 1,007,211
Other receivables 10,000
-----------
Total current assets 1,017,211
PROPERTY AND EQUIPMENT, net of accumulated depreciation 519,929
DEPOSITS 21,012
-------
Total assets $ 1,558,152
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 100,587
-----------
Total current liabilities 100,587
-----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares authorized,
13,000,010 shares issued and outstanding 130,000
Paid-in capital 2,184,814
Deficit accumulated during the development stage (857,249)
-----------
Total stockholders' equity 1,457,565
-----------
Total liabilities and stockholders' equity $ 1,558,152
===========
The Accompanying Notes Are An Integral Part
Of These Consolidated Financial Statements
F-3
</TABLE>
<PAGE>
49
<TABLE>
<CAPTION>
MEGAMEDIA NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
For The Period of May 27, 1999 (date of inception) Through December 31, 1999
<S> <C>
REVENUES $ --
-----------
EXPENSES:
Advertising 6,525
Automobile 4,584
Contributions 750
Depreciation 11,242
Dues and subscriptions 1,861
Employee leasing 398,499
Equipment rentals 13,416
Insurance 15,454
Licenses and permits 4,438
Marketing 31,259
Miscellaneous 5,752
Office 19,299
Parking and tolls 7,576
Postage 2,273
Printing and reproduction 14,188
Professional development 16,154
Professional fees 61,809
Rent 41,450
Repairs and maintenance 13,087
Supplies 30,617
Taxes-other 5,585
Telephone 29,222
Travel 126,479
Utilities 3,742
-----------
Total expenses 865,261
-----------
OTHER INCOME:
Interest income 8,012
-----------
LOSS BEFORE INCOME TAXES (857,249)
INCOME TAXES --
----------
NET LOSS $ (857,249)
===========
BASIC EARNINGS (LOSS) PER COMMON SHARE $ (.07)
===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,877,401
===========
The Accompanying Notes Are An Integral Part
Of These Consolidated Financial Statements
F-4
</TABLE>
<PAGE>
50
<TABLE>
<CAPTION>
MEGAMEDIA NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
For The Period of May 27, 1999 (date of inception) Through December 31, 1999
Deficit
Common Stock Accumulated
--------------------------- During the Total
Number of Par Paid-in Development Stockholders'
Shares Value Capital Stage Equity
--------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Common stock issued to
founding directors in
exchange for services 2,500 $ 25 $ 24,975 $ -- $ 25,000
Common stock issued in
exchange for services 5,000 50 49,950 -- 50,000
Recapitalization, including
effect of reverse
acquisition 11,852,510 118,525 (118,525) -- --
Stock issuance costs -- -- (40,186) -- (40,186)
Common stock issued
for cash 780,000 7,800 1,552,200 -- 1,560,000
Common stock issued in
exchange for conversion
of notes payable 360,000 3,600 716,400 -- 720,000
Net loss -- -- -- (857,249) (857,249)
----------- --------- ----------- ---------- -----------
BALANCE -
December 31, 1999 13,000,010 $ 130,000 $ 2,184,814 $ (857,249) $ 1,457,565
============ ========= =========== ========== ===========
</TABLE>
The Accompanying Notes Are An Integral Part
Of These Consolidated Financial Statements
F-5
<PAGE>
51
<TABLE>
<CAPTION>
MEGAMEDIA NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For The Period of May 27, 1999 (date of inception) Through December 31, 1999
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash paid to suppliers $ (720,606)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (531,171)
Payments of security deposits (21,012)
-----------
Net cash flows from investing activities (552,183)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,560,000
Proceeds from notes payable 720,000
-----------
Net cash flows from financing activities 2,280,000
-----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,007,211
CASH AND CASH EQUIVALENTS - Beginning of year --
-----------
CASH AND CASH EQUIVALENTS - End of year $ 1,007,211
===========
RECONCILIATION OF NET LOSS TO NET CASH FLOWS
FROM OPERATING ACTIVITIES:
Net loss $ (857,249)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation 11,242
Noncash professional fees 75,000
Noncash stock issuance costs (40,186)
Change in other receivables (10,000)
Change in accounts payable 100,587
-----------
NET CASH FLOWS FROM OPERATING ACTIVITIES $ (720,606)
===========
</TABLE>
--------------------------------------------------------------------------------
NONCASH FINANCING ACTIVITIES:
During the period of May 27, 1999 (date of inception) through December 31, 1999,
the Company issued 7,500 shares of common stock, in exchange for professional
services received valued at $75,000.
During the period of May 27, 1999 (date of inception) through December 31, 1999,
the Company converted notes payable in the amount of $720,000 into 360,000
shares of common stock.
The Accompanying Notes Are An Integral Part
Of These Consolidated Financial Statements
F-6
<PAGE>
52
MEGAMEDIA NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
For The Period of May 27, 1999 (date of inception) Through December 31, 1999
NOTE A - NATURE OF OPERATIONS
MegaMedia Networks, Inc. (a Nevada corporation and a development stage company)
("Company") was incorporated on May 27, 1999 and is headquartered in Orlando,
Florida. The Company provides users of the internet with an online environment
for purchasing specialized on- demand or live pay-per-view events, music,
videos, concerts and services.
On October 6, 1999, MegaMedia Networks, Inc. agreed to exchange shares with
Amalgamated Entertainment, Inc., a Delaware public company. Accordingly,
MegaMedia Networks, Inc. exchanged all outstanding shares of the Company's
common stock for 10,461,367 shares of Amalgamated Entertainment, Inc. stock in a
business combination accounted for as a reverse acquisition. During the period
Amalgamated Entertainment, Inc. was in existence, prior to the reverse
acquisition, its only activity was to raise equity capital. For accounting
purposes, the reverse acquisition is reflected as if MegaMedia Networks, Inc.
issued its stock for the net assets of Amalgamated Entertainment, Inc. The net
assets of Amalgamated Entertainment, Inc. were not adjusted in connection with
the reverse acquisition since they were monetary in nature. Coincident with the
reverse acquisition, Amalgamated Entertainment, Inc. changed its name to
MegaMedia Networks, Inc.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Parent and its wholly-owned Subsidiary. All material intercompany
transactions have been eliminated.
DEVELOPMENT STAGE OPERATIONS: The Company was incorporated May 27, 1999.
Operations to date have been devoted primarily to raising capital, obtaining
financing, establishing supplier affiliations and strategic alliance
arrangements, establishing the corporate headquarters, and administrative
functions.
CASH AND CASH EQUIVALENTS: For purposes of the statement of cash flows, the
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
the related assets.
DEFERRED INCOME TAXES: Deferred income taxes result from the tax effects of net
operating loss carry forwards and temporary differences between the basis of
items for income tax purposes and the carrying amounts of such items for
financial reporting purposes. The primary temporary difference which gives rise
to the Company's deferred income tax balance relates to the use of accelerated
depreciation methods for tax purposes. A valuation allowance has been provided
for the deferred tax asset balance based on the Company's assessment of the
likelihood of realization.
STOCK-BASED COMPENSATION: In October 1995, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123) which sets forth accounting and
disclosure requirements for stock-based compensation arrangements. The new
statement encourages but does not require, companies to measure stock-based
compensation using a fair value method, rather than the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25 (APB no. 25.) The
Company has adopted disclosure requirements of SFAS 123 and has elected to
continue to record stock-based compensation expense using the intrinsic value
approach prescribed by APB No. 25. Accordingly, the Company computes
compensation cost for each employee stock option granted as the amount by which
the quoted market price of the Company's common stock on the date of grant
exceeds the amount the employee must pay to acquire the stock. The amount of
compensation cost, if any, will be charged to operations over the vesting
period.
F-7
<PAGE>
53
MEGAMEDIA NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
For The Period of May 27, 1999 (date of inception) Through December 31, 1999
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES: Management uses estimates and assumptions in preparing
consolidated financial statements. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and reported revenues and expenses. Significant estimates used
in preparing these consolidated financial statements include those assumed in
determining the estimated useful lives of property and equipment. It is at least
reasonably possible that the significant estimates used will change within the
next year.
ADVERTISING COSTS: Advertising costs are expensed as incurred.
NOTE C - CONCENTRATION OF CREDIT RISK
The Company maintains its cash in a bank account which, at times, may exceed
federally insured limits. The Company has not experienced any losses in this
account and believes it is not exposed to any significant credit risk related to
cash and cash equivalents.
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Estimated
Category Cost Lives
----------------------------------- --------- --------
Leasehold improvements $ 50,531 39 years
Office furniture and equipment 19,309 7 years
Computer equipment 313,050 3-7 years
Software development in process 148,281 3 years
---------
Total property and equipment 531,171
Less: Accumulated depreciation (11,242)
---------
Net property and equipment $ 519,929
=========
NOTE E - COMMITMENTS AND CONTINGENCIES
LEASES: The Company is the lessee under operating lease agreements for its
office facility and for certain furniture and equipment. Total lease expense
under these leases amounted to approximately $43,000 for the year ended December
31, 1999. Future minimum lease payments under these operating leases as of
December 31, 1999, are approximately as follows:
YEAR ENDING
DECEMBER 31,
------------
2000 $ 268,300
2001 $ 224,600
2002 $ 69,000
In addition, the Company is obligated under a 3-year agreement with an internet
traffic consolidator ("NextTraffic"), a corporation owned by the President of
the Company, who will provide pre-qualified internet traffic to the Company's
Website. Under the terms of this agreement. NextTraffic will provide up to 2
million visitors per day to the website at a cost of $0.03 per visitor or up to
$60,000 per day.
F-8
<PAGE>
54
MEGAMEDIA NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
For The Period of May 27, 1999 (date of inception) Through December 31, 1999
NOTE E - COMMITMENTS AND CONTINGENCIES (Continued)
EMPLOYMENT AGREEMENTS: The Company has entered into employment agreements with
certain key employees with terms ranging from one to three years. Future
obligations under these agreements as of December 31, 1999 are as follows:
Year Ending
December 31,
------------
2000 $ 750,000
2001 $ 537,500
2002 $ 420,000
2003 $ 70,000
NOTE F - STOCK OPTIONS
During the year ended December 31, 1999, the Company offered stock options to
certain employees whereby the employees may purchase a certain number of shares
of common stock at specified amounts. Under the terms of the option agreements,
the options are only exercisable upon being fully vested which does not occur
until the year 2001. Therefore, no compensation expense related to these options
has been recorded in the accompanying consolidated financial statements.
In addition, the Company has offered stock options to certain additional
employees subsequent to the balance sheet date. Under the terms of the option
agreements, employees are granted a certain number of options to purchase the
Company's common stock at specified amounts.
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25
under which no compensation cost for stock options is recognized for stock
option awards granted at or above fair market value.
Had compensation expense been determined based upon fair values at the grant
date for the award of options as described herein in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's net loss and basic
earnings (loss) per common share would not be materially changed from the
amounts as reported in the accompanying consolidated financial statements.
Accordingly, management has not presented the pro forma effects of the
application of SFAS No. 123 herein with respect to net loss and basic earnings
(loss) per common share for the period of May 27, 1999 (date of inception)
through December 31, 1999.
NOTE G - SUBSEQUENT EVENTS
Subsequent to the balance sheet date, the Company offered two confidential
private offering memorandums. The first offering, which was dated December 15,
1999, produced $3,181,032 of additional equity by issuing 1,060,344 shares of
restricted common stock for $3.00 per share. This offering expired January 14,
2000. The second offering, which is dated March 8, 2000, expects to produce
$5,000,000 of additional equity by offering 1,000,000 shares of restricted
common stock for $5.00 per share. This offering expires April 30, 2000.
F-9
<PAGE>
55
<TABLE>
<CAPTION>
MEGAMEDIA NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2000 1999
(Unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents ........................................ $ 15,046 $ 1,007,211
Accounts receivable, net ......................................... 349,682 --
Prepaid expenses ................................................. 365,640 --
----------- -----------
Total current assets ..................................... 730,368 1,007,211
PROPERTY AND EQUIPMENT, NET ........................................... 1,695,240 371,648
DEPOSITS .............................................................. 15,411 21,012
WEBSITE DEVELOPMENT, NET .............................................. 450,473 148,281
GOODWILL, NET ......................................................... 1,532,692 --
----------- -----------
Total assets ............................................. $ 4,424,184 $ 1,548,152
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ................................................. $ 1,070,545 $ 100,587
Accrued liabilities
Salaries and benefits ....................................... 201,560 --
Other ....................................................... 81,795 --
Notes payable .................................................... 1,287,377 --
----------- -----------
Total current liabilities ................................ 2,641,277 100,587
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 50,000,000 shares
authorized, 14,214,356 shares issued and
outstanding, and 113,072 shares subscribed at
June 30, 2000, 13,000,010 shares issued and
outstanding at December 31, 1999 ............................. 143,274 130,000
Additional paid-in capital ....................................... 6,934,561 2,184,814
Accumulated deficit .............................................. (5,294,928) (857,249)
Stock subscription receivable .................................... -- (10,000)
----------- -----------
Total stockholders' equity ............................... 1,782,907 1,447,565
----------- -----------
COMMITMENTS ........................................................... -- --
----------- -----------
Total liabilities & stockholders' equity $ 4,424,184 $ 1,548,152
=========== ===========
</TABLE>
The Accompanying Notes Are An Integral Part
Of These Condensed Consolidated Financial Statements
1
<PAGE>
56
<TABLE>
<CAPTION>
MEGAMEDIA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES ................................................... $ 394,571 $ -- $ 438,640 $ --
COST OF SALES ............................................... 820,903 -- 1,301,481 --
------------ ------------ ------------ ------------
GROSS MARGIN ................................................ (426,332) -- (862,841) --
------------ ------------ ------------ ------------
OPERATING EXPENSES
General and administrative .................................. 1,476,303 5,311 2,246,812 5,311
Programming and production .................................. 239,701 -- 433,510 --
Sales and marketing ......................................... 274,488 -- 626,873 --
Research and development .................................... 134,341 -- 295,891 --
------------ ------------ ------------ ------------
Total operating expenses .................................... 2,124,833 5,311 3,603,086 5,311
------------ ------------ ------------ ------------
OPERATING LOSS .............................................. (2,551,165) (5,311) (4,465,927) (5,311)
OTHER INCOME(EXPENSES)
Interest expense ....................................... (12,019) -- (12,019) --
Interest income ........................................ 10,166 -- 40,267 --
------------ ------------ ------------ ------------
Total other income(expenses) ................................ (1,853) -- 28,248 --
------------ ------------ ------------ ------------
NET LOSS .................................................... $ (2,553,018) $ (5,311) $ (4,437,679) $ (5,311)
============ ============ ============ ============
LOSS PER COMMON SHARE ....................................... $ (0.18) $ (0.00) $ (0.32) $ (0.00)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING ................................ 14,277,297 2,428,450 13,953,652 1,477,467
============ ============ ============ ============
</TABLE>
The Accompanying Notes Are An Integral Part
Of These Condensed Consolidated Financial Statements
2
<PAGE>
57
<TABLE>
<CAPTION>
MEGAMEDIA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
Common Stock
------------------------------ Stock Total
Number of Par Paid-in Accumulated Subscription Stockholders'
Shares Value Capital Deficit Receivable Equity
---------- -------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999 13,000,010 $130,000 $2,184,814 $ (857,249) $ (10,000) $ 1,447,565
Issuance of common shares
at $3.00 per share 1,044,346 10,443 3,122,595 -- -- 3,133,038
Issuance of common shares
at $5.00 per share 83,072 831 414,529 -- -- 415,360
Issuance of common shares
for acquisition 200,000 2,000 998,000 -- -- 1,000,000
Stock subscription received -- -- -- -- 10,000 10,000
Stock option compensation -- -- 214,623 -- -- 214,623
Net loss -- -- -- (4,437,679) -- (4,437,679)
---------- -------- ---------- ----------- ----------- -----------
BALANCE, June 30, 2000 14,327,428 $143,274 $6,934,561 $(5,294,928) $ -- $ 1,782,907
========== ======== ========== =========== =========== ===========
</TABLE>
The Accompanying Notes Are An Integral Part
Of These Condensed Consolidated Financial Statements
3
<PAGE>
58
<TABLE>
<CAPTION>
MEGAMEDIA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................................... $(4,437,679) $ (5,311)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation ............................................ 197,772 --
Amortization .......................................... 330,692 --
(Gain)loss on disposition of assets ................... 7,622 --
Noncash compensation from stock options granted ....... 214,623 --
Changes in operating assets and liabilities:
Increase in accounts receivable ....................... (349,682) --
Increase in prepaid expenses ............................ (62,138) --
Decrease in deposits .................................... 5,601 --
Increase in accounts payable ............................ 969,957 --
Increase in accrued liabilities ....................... 283,355 --
----------- -----------
Net cash flows from operating activities ....... (2,839,877) (5,311)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment .......................... (620,195) --
Payments for website development ............................ (345,504) --
Business combination ........................................ (1,000,000) --
----------- -----------
Net cash flows from investing activities ............ (1,965,699) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock ...................... 3,549,536 26,268
Proceeds from notes payable ................................. 348,642 2,311
Principal payments of notes and debt obligations ............ (84,767) --
----------- -----------
Net cash flows from financing activities ............ 3,813,411 28,579
----------- -----------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS .............. (992,165) 23,268
CASH AND CASH EQUIVALENTS - beginning of period .................. 1,007,211 --
----------- -----------
CASH AND CASH EQUIVALENTS - end of period ........................ $ 15,046 $ 23,268
=========== ===========
-----------
NONCASH FINANCING INVESTING AND ACTIVITIES:
Note payable to finance directors and officers liability insurance $ 303,502 $ --
Note payable to finance business combination ..................... 720,000 --
Common stock issued in business combination ...................... 1,000,000 --
Common stock issued in exchange for purchase of assets ........... 8,862 --
Compensation from stock options granted .......................... 214,623 --
</TABLE>
The Accompanying Notes Are An Integral Part
Of These Condensed Consolidated Financial Statements
4
<PAGE>
59
MEGAMEDIA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - GENERAL
MegaMedia Networks, Inc. (the "Company") was incorporated under the laws of the
state of Delaware on May 27, 1999 and is headquartered in Orlando, Florida. The
Company provides users of the Internet with an online environment for purchasing
specialized on-demand or live pay-per-view events, music, videos, concerts and
services. Through its wholly-owned subsidiary Titan Hosting, Inc. ("Titan"), the
Company also serves as an Internet service provider and provider of bandwidth to
various third party websites.
The accompanying condensed consolidated balance sheet of MegaMedia Networks,
Inc. as of June 30, 2000, the related condensed consolidated statement of
operations for the three months and six months ended June 30, 2000 and 1999, and
the related condensed consolidated statement of stockholders' equity and
statement of cash flows for the six months ended June 30, 2000 and 1999 are
unaudited. In the opinion of management, such financial statements reflect all
adjustments, consisting only of normal recurring items, necessary to present
fairly the financial position of the Company at June 30, 2000 and the results of
operations, stockholders' equity and cash flows for the three months and six
months ended June 30, 2000 and 1999.
Certain reclassifications have been made to the condensed consolidated balance
sheet at December 31, 1999, to conform with classifications used in the
unaudited condensed consolidated balance sheet at June 30, 2000. In addition,
the Company was not required to file a Form 10-QSB for the period ended June 30,
1999. The Company did not file a Form 10-QSB until the period ended September
30, 1999, at which time the Company filed as Amalgamated Entertainment, Inc. On
November 29, 1999, the Company's Certificate of Incorporation was amended to
reflect a name change from Amalgamated Entertainment, Inc. to MegaMedia
Networks, Inc.
The accompanying unaudited financial statements as of June 30, 2000, and for the
three months and six months ended June 30, 2000 and 1999 should be read in
conjunction with the Company's audited financial statements for the year ended
December 31, 1999.
The accompanying unaudited financial statements have been prepared assuming that
the Company will continue operations on a going-concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. However, the Company was in the development stage
until March 25, 2000 and Titan did not become operational until April 14, 2000.
On a consolidated basis, the Company has incurred an accumulated deficit of
$5,294,928 as of June 30, 2000. The Company's ability to continue as a going
concern is dependent upon the attainment of a profitable level of operations.
The Company's ability to attain profitable operations is contingent upon its
ability to raise additional capital to continue the development of its website,
acquire content, build brand name recognition, expand the client base of Titan
and grow its business. The Company is currently soliciting additional capital in
the form of equity to fund its working capital, capital expenditure and debt
service requirements to attain such profitable operations. However, there is no
assurance that the Company will be able to attain such equity capital and
continue as a going concern. If the Company is unable to secure additional
capital, it is likely that its operations will be impacted in an adverse manner,
which would further hinder its ability to continue as a going concern.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION: The Company's sales revenue for on-demand, pay-per-view
events, and monthly subscriptions are recorded at the time of viewing, or for
the applicable month of the subscription. Advertising revenues are recorded at
such time as the advertisements are viewed, pursuant to data provided by the
Company's own website and that of its advertisement suppliers. Titan's sales
revenue is recorded on a monthly basis as the Internet or bandwidth service is
provided.
5
<PAGE>
60
MEGAMEDIA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30, December 31, Estimated
Category 2000 1999 Lives
----------------------------------- ---------- --------- ---------
Leasehold improvements $ 122,572 $ 50,531 Lease Term
Office furniture and equipment 256,243 19,309 5-7 years
Computer equipment 1,523,870 313,050 3 years
---------- ---------
Total property and equipment 1,902,685 382,890
Less: Accumulated depreciation (207,445) (11,242)
---------- ---------
Net property and equipment $1,695,240 $ 371,648
========== =========
On April 14, 2000, the Company, through its wholly-owned subsidiary Titan,
acquired $899,929 of computer equipment from City-Guide ISP, Inc.
("City-Guide"), pursuant to a Purchase and Sale of Assets Agreement among
City-Guide, David Marshlack, Dan Marshlack, Bruce C. Hammil and Mark Dolan,
as shareholders of City-Guide, and the Company and Titan.
NOTE D - NOTES PAYABLE
Effective March 13, 2000, the Company entered into a Premium Finance
Agreement which financed 80% of the Company's directors' and officers'
liability insurance policy. The agreement bears an annual interest rate of
9.5% and is payable in nine monthly installments beginning June 2, 2000. As
of June 30, 2000, the Company owed $270,833 under this agreement. As of
June 30, 2000, the Company's prepaid expenses included $315,045 related to
unamortized directors' and officers' liability insurance.
Pursuant to a Purchase and Sale of Assets Agreement, dated April 14, 2000
(see "Note C" above), the Company, through its wholly-owned subsidiary
Titan, executed a Convertible Promissory Note (the "Note") for $720,000 to
City-Guide. The Note bears an interest rate equal to the lowest interest
rate per annum imputed by the Internal Revenue Service for a note of this
nature, and is payable in monthly payments of $30,000 beginning May 14,
2000. As of June 30, 2000, the Company owed $667,902 under this agreement.
The Note is secured by the assets purchased pursuant to the agreement (see
"Note C" above) and six Internet service agreements assumed by Titan,
previously held by City-Guide. The Note and accrued interest thereon is
convertible at any time, at the option of the holder into shares of common
stock at a conversion price equal to $3.00 per share.
On July 6, 2000, the Company executed two Revolving Promissory Notes with
The Orlando Group Downtown LLC, one for $350,000 and one for $150,000 (the
"Notes"). The Notes bear interest at a rate equal to the prime rate
announced by AmSouth Bank on the first day of each month, less one-half of
one percent, and are payable on demand. As of June 30, 2000, the Company
owed $348,642 under the first note, and accrued interest of $1,715. The
Notes are secured by all of the Company's accounts, inventory, equipment
and furniture, together with all proceeds and products thereof, and all
books and records and insurance proceeds relating thereto. At such time as
the Company's common stock begins trading on a recognized trading system,
the Notes and accrued interest thereon are convertible at any time, in
whole or in part, at the option of the holder into shares of common stock.
The conversion price is equal to 80% of the average closing bid price of
the common stock on the principal exchange or trading mechanism on which
the common stock is traded for the three days prior to the receipt of a
notice of conversion.
6
<PAGE>
61
MEGAMEDIA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE E - STOCKHOLDERS' EQUITY
During the six months ended June 30, 2000, the Company conducted two
private offerings. The first offering, which commenced December 15, 1999,
produced $3,133,038 of additional equity through the private placement of
1,044,346 shares of restricted common stock for $3.00 per share. The second
offering, which commenced March 8, 2000, has produced $490,360 of
additional equity through the private placement of 98,072 shares of
restricted common stock for $5.00 per share. Of the $5.00 shares raised,
$415,360, representing 83,072 shares was received and recorded during the
three months ended June 30, 2000; $75,000, representing 15,000 shares was
received and recorded subsequent to June 30, 2000. This offering expires
September 15, 2000. The shares were included in the earnings per share
calculations as of the date cash was received, however share certificates
representing 113,072 of the shares were issued subsequent to June 30, 2000.
Pursuant to a Purchase and Sale of Assets Agreement, dated April 14, 2000
(see "Note C" above), the Company issued City-Guide 200,000 restricted
shares of common stock. The Company recorded the shares at $1,000,000 based
on the $5.00 private placement offering being sold at that time.
Effective June 1, 2000, the Company's Board of Directors adopted the 2000
Stock Option Plan (the "Plan"). The Plan provides the Board of Directors
with the authority to grant to officers, directors, employees and
independent contractors of the Company non- qualified and incentive stock
options to purchase shares of the Company's common stock. The purpose of
the Plan is to advance the interests of the Company by providing an
additional incentive to attract and retain qualified and competent persons
who provide services to the Company and upon whose efforts and judgement
the success of the Company is largely dependent, through the encouragement
of stock ownership in the Company by such persons. Subject to a few
restrictions, the Board of Directors has the authority to determine the
option periods, the option prices, the number of shares of common stock
subject to options granted, and such other terms and conditions under which
options are exercised. To date, the Company has issued 200,668
non-qualified stock options pursuant to the Plan at option prices ranging
from $2.00 to $5.00. Of the options granted, 25,000 were exerciseable at
June 30, 2000, however, no shares have been exercised. Pursuant to
Accounting Principles Board Opinion No. 25, and Statements of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
the Company is required to record $338,045 of compensation expense pursuant
to the options issued, of which $214,623 has been recorded at June 30,
2000. The compensation expense was determined based upon fair values at the
date of grant exceeding that of certain option prices.
<PAGE>
62
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
--------------------
In connection with our acquisition of MegaMedia-Nevada, we ended our
relationship with our former auditors, Mantyla McReynolds, Certified Public
Accountants, of Salt Lake City, Utah, and hired Parks, Tschopp, Whitcomb & Orr
LLP as our principal accountants. In connection with the audit of our financial
statements for the fiscal years ended December 31, 1998, and 1997, we did not
have any disagreements with Mantyla McReynolds on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures which, if not resolved to their satisfaction, would have caused them
to make reference to the disagreement in connection with their report. The
report of Mantyla McReynolds for the fiscal years ended December 31, 1998 and
1997 did not contain an adverse opinion or a disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
The decision to change independent auditors from Mantyla McReynolds to Parks,
Tschopp, Whitcomb & Orr was approved by our Board of Directors. On July 27,
2000, we filed with the Securities and Exchange Commission a Current Report on
Form 8-K disclosing this matter. You may review this Current Report by accessing
the Securities and Exchange Commission's web site: www.sec.gov.
On April 17, 2000, we terminated Parks, Tschopp, Whitcomb & Orr LLP as our
principal accountants and retained KPMG LLP as our new principal accounants. In
connection with the audit of our financial statements for the fiscal year ended
December 31, 1999, and the subsequent interim period through April 17, 2000, we
did not have any disagreements with Parks, Tschopp, Whitcomb & Orr LLP on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedures which, if not resolved to their satisfaction, would
have caused them to make reference to the disagreement in connection with their
opinion. Our Board of Directors approved this change in accountants. On April
21, 2000, we filed with the Securities and Exchange Commission a Current Report
on Form 8-K disclosing this matter. You may review this Current Report by
accessing the Securities and Exchange Commission's web site.
DEALER PROSPECTUS DELIVERY OBLIGATION
-------------------------------------
Until ____________, all dealers that effect transaction in these securites,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
63
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors And Officers
-----------------------------------------
Under the Delaware General Corporation Law, a corporation has the power to
indemnify any person who is made a party to any civil, criminal, administrative
or investigative proceeding, other than an action by or in the right of the
corporation, by reason of the fact that such person was a director, officer,
employee or agent of the corporation, against expenses, including reasonable
attorneys' fees, judgments, fines and amounts paid in settlement of any such
actions; provided, however, in any criminal proceeding, the indemnified person
shall have had no reason to believe the conduct committed was unlawful. Article
VIII of our Bylaws contains similar indemnification language.
Article 10 of our Certificate of Incorporation, as amended, eliminates
personal liability of our directors to the fullest extent of Section 102(b)(7)
of the Delaware General Corporation Law. Under that section, a company's
Certificate of Incorporation may contain a provision eliminating or limiting the
personal liability of a director to a corporation or its stockholders for
monetary damages for breach of his or her fiduciary duty as a director. However,
such a provision may not eliminate or limit a director's liability for:
any breach of his or her duty of loyalty;
acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
the unlawful payment of a dividend or any unlawful stock purchase
or redemption; or
any transaction from which the director derived an improper
personal benefit.
Article 11 of our Certificate of Incorporation, as amended, requires
MegaMedia to indemnify all persons that it has the power to indemnify under
applicable provisions of the Delaware General Corporation Law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
MegaMedia pursuant to the foregoing provisions, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
The foregoing is only a summary of the indemnification provisions of our
Certificate of Incorporation, Bylaws and contracts. See the Exhibit Index.
Item 25. Other Expenses of Issuance And Distribution
-------------------------------------------
The following table sets forth the expenses which we expect to incur in
connection with the registration of the shares of common stock being registered
hereby. All of these expenses, except for the Commission registration fee, are
estimated:
Securities and Exchange Commission registration fee........$ 200.37
Legal fees and expenses....................................$25,000
Accounting fees............................................$ 1,200
Printing and engraving expenses............................$ 500
Transfer agent fees........................................$ 1,500
Miscellaneous..............................................$ 500
------
Total................................................$ 28,900.37
<PAGE>
64
Item 26. Recent Sales of Unregistered Securities
---------------------------------------
On January 9, 1999, MegaMedia issued 250,000 shares of common stock to an
accredited investor, Jenson Services, Inc., in exchange for Jenson Services'
payment of $3,000 in expenses incurred and owed by MegaMedia. The shares were
issued in reliance upon Section 4(2) of the Securities Act of 1933, as amended.
Jenson Services was provided information about MegaMedia or had access to such
information, and it had the opportunity to ask questions of management about the
information it received. Jenson Services confirmed in writing its investment
intent, and its stock certificates bear a "restrictive" legend.
On April 6, 1999, we issued 2,000,000 shares of our common stock to
accredited investors and a limited number of otherwise qualified investors. We
issued the shares at a price of $0.03 each in an offering under Rule 504 of
Regulation D of the Securities Act. Officers and directors made the offers and
sales without compensation.
On October 6, 1999, pursuant to our agreement with MegaMedia-Nevada and
MegaMedia-Nevada's stockholders, we issued 10,461,367 shares of our common stock
to MegaMedia-Nevada's stockholders in exchange for 100% of the outstanding
securities of MegaMedia-Nevada. We issued the shares in reliance on Section 4(2)
of the Securities Act. We gave the MegaMedia-Nevada stockholders information
about us, and we gave the stockholders opportunities to ask questions about the
information. The stockholders confirmed in writing their investment intent, and
their stock certificates bear a "restrictive" legend.
On October 14, 1999, we began a private offering of common stock. We issued
1,140,000 shares of our common stock to accredited investors. All shares were
sold at a price of $2 per share, which included conversion of an outstanding
debt of $720,000 into 360,000 shares. We received aggregate gross proceeds of
$2,280,000, including cancellation of the debt. We issued the shares in reliance
on an exemption from registration provided by Rule 506 of Regulation D of the
Securities Act. The investors confirmed their investment intent in writing, and
their stock certificates bear a "restrictive" legend. Our officers and directors
made the offers and sales without compensation.
On December 15, 1999, we commenced a private offering of common stock. We
have issued 1,052,345 shares of our common stock to accredited investors. All
1,052,345 shares were sold for $3 per share, for aggregate proceeds of
$3,157,035. The shares were issued in reliance upon an exemption from
registration pursuant to Section 4(2) and/or Rule 506 of Regulation D of the
Securities Act. The investors confirmed in writing their investment intent, and
their stock certificates bear or will bear a "restrictive" legend. The offers
and sales were made by officers and directors of MegaMedia without compensation.
We began another private offering on March 8, 2000. We offered one million
"unregistered" and "restricted" shares of our common stock at a price of $5.00
per share. As of July 27, 2000, we have sold 98,072 shares under the private
placement, for gross proceeds of $490,360. We closed the offering in August
2000.
On April 14, 2000, we issued 200,000 "unregistered" and "restricted" shares
of our common stock to City-Guide ISP, Inc., pursuant to our Purchase and Sale
of Assets Agreement.
<PAGE>
65
Item 27. Exhibits
--------
The following exhibits are filed as a part of this Registration Statement:
Exhibit
EXHIBIT DESCRIPTION
2.1 Agreement and Plan of Reorganization, dated October 6, 1999, among the
Company, MegaMedia-Nevada and MegaMedia-Nevada stockholders.
3.1 Articles of Incorporation of ACE Investments, Inc., a Utah corporation,
filed March 26, 1985.
3.2 By-Laws of the Company.
3.3 Articles of Amendment to the Articles of Incorporation changing the
Company's name to "Matlock Communications, Inc.," filed August 28,
1986.
3.4 Articles of Amendment to the Articles of Incorporation changing the
Company's name to "Persimmon Corporation," filed June 28, 1989.
3.5 Certificate of Incorporation of Amalgamated Entertainment, Inc., a
Delaware corporation, filed December 20, 1991.
3.6 Articles of Merger of Persimmon Corporation into Amalgamated
3.7 Certificate of Amendment to the Company's Certificate of Incorporation
with respect to a 30-1 reverse stock split, filed April 6, 1999.
3.8 Certificate of Amendment to the Company's Certificate of Incorporation
with respect to a 2.5-1 stock split, filed September 13, 1999.
3.9 Certificate of Amendment to the Company's Certificate of Incorporation
to change the Company's name to "MegaMedia Networks, Inc." filed
November 29, 1999.
4.1 Stock Option Agreement, dated January 5, 2000, between the Company and
William A. Mobley, Jr.
4.2 2000 Stock Option Plan, effective June 1, 2000.
5.1 Legal Opinion on Registration Statement on Form SB-2,
dated September 1, 2000, by Branden T. Burningham, Esq.
10.1 Lease Agreement, dated June 14, 1999, between Kyung Park and Bang Park,
landlords, and the Company.
10.1.1 Addendum to Lease Agreement, dated October 6, 1999.
10.2 Product Development Agreement, dated January 7, 2000, between the
Company and Nextelligent, Inc.
10.3 Internet Traffic Agreement dated January 7, 2000 between the Company
and NextTraffic, Inc.
10.4 Employment Agreement, dated July 16, 2000, between the Company and
William A. Mobley, Jr.
10.5 Escrow Agreement, dated as of December 29, 1999, among the Company,
certain stockholders of the Company and Christopher P. Flannery, as
escrow agent ("Flannery").
<PAGE>
66
10.6 Purchase and Sale of Assets Agreement, dated April 14, 2000, among
City-Guide ISP, Inc., David Marshlack, Dan Marshlack, Bruce C. Hammil,
Mark R. Dolan and Titan Hosting, Inc. and MegaMedia Networks, Inc.
10.7 Convertible Promissory Note, dated April 14, 2000, issued by Titan
Hosting, Inc. in favor of City-Guide ISP, Inc. in the principal amount
of $720,000.
10.8 Security Agreement, dated April 14, 2000, between Titan Hosting, Inc.
and City-Guide ISP, Inc.
10.9 Unconditional Corporate Guaranty, dated April 14, 2000, executed by
MegaMedia Networks, Inc.
10.10 Subscription and Registration Rights Agreement, Dated April 14, 2000,
between MegaMedia networks, Inc. and City-Guide ISP, Inc.
10.11 Employment Agreement, dated January 10, 2000, between the Company and
David A. Gust, to include exhibits and addendum thereto.
10.12 Employment Agreement, dated February 7, 2000, between the Company and
Steven H. Noble, III, and Stock Option Agreements and addedeum as
exhibits thereto.
21 List of subsidiaries.
23.1 Consent of the Company's auditor, Parks, Tschopp, Whitcomb & Orr,
to be named in the Prospectus included in this Registration
Statement on Form SB-2.
23.2 Consent of Branden T. Burningham, Esq., to be named in the
Prospectus included in this Registration Statement on Form SB-2.
27 Financial Data Schedule reflecting the year ended December 31, 1999
and the six months ended June 30, 2000.
<PAGE>
Item 28. Undertakings
------------
MegaMedia hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement; and
(iii) include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering.
(3) To file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, executive officers and controlling
persons the foregoing provisions or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. If a claim for indemnification against such liabilities (other
than our payment of expenses incurred or paid by any of our directors, executive
officers or controlling persons in the successful defense of any action, suit or
proceeding) is asserted by such director, executive officer or controlling
person in connection with the securities being registered, we will, unless in
the opinion of our counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
<PAGE>
67
SIGNATURES
----------
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing of Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the City of Orlando,
State of Florida, on September 1, 2000.
MEGAMEDIA NETWORKS, INC.
By /S/ DAVID A. GUST
---------------------------------
David A. Gust
Chief Executive Officer, President
and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following person in the capacities and
on the dates stated.
/S/ DAVID A. GUST
---------------------------------
David A. Gust
Chief Executive Officer,
President and Director
/S/ STEPHEN H. NOBLE III
---------------------------------
Stephen H. Noble, III
Vice President, Chief Financial
Officer and Secretary/Treasurer
/S/ WILLIAM A. MOBLEY, JR
---------------------------------
William A. Mobley, Jr.
Director
/S/ MYRON E. TILLMAN
---------------------------------
Hon. Myron E. Tillman
Director
<PAGE>
68
Date Filed: September 1, 2000 SEC File No. _________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM SB-2 REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
MEGAMEDIA NETWORKS, INC.
Item 27. Exhibits
--------
The following exhibits are filed as a part of this Registration Statement:
EXHIBIT DESCRIPTION
2.1 Agreement and Plan of Reorganization, dated October 6, 1999, among the
Company, MegaMedia-Nevada and MegaMedia-Nevada stockholders.
3.1 Articles of Incorporation of ACE Investments, Inc., a Utah corporation,
filed March 26, 1985.
3.2 By-Laws of the Company.
3.3 Articles of Amendment to the Articles of Incorporation changing the
Company's name to "Matlock Communications, Inc.," filed August 28,
1986.
3.4 Articles of Amendment to the Articles of Incorporation changing the
Company's name to "Persimmon Corporation," filed June 28, 1989.
3.5 Certificate of Incorporation of Amalgamated Entertainment, Inc., a
Delaware corporation, filed December 20, 1991.
3.6 Articles of Merger of Persimmon Corporation into Amalgamated
3.7 Certificate of Amendment to the Company's Certificate of Incorporation
with respect to a 30-1 reverse stock split, filed April 6, 1999.
3.8 Certificate of Amendment to the Company's Certificate of Incorporation
with respect to a 2.5-1 stock split, filed September 13, 1999.
3.9 Certificate of Amendment to the Company's Certificate of Incorporation
to change the Company's name to "MegaMedia Networks, Inc." filed
November 29, 1999.
4.1 Stock Option Agreement, dated January 5, 2000, between the Company and
William A. Mobley, Jr.
4.2 2000 Stock Option Plan, effective June 1, 2000.
5.1 Legal Opinion on Registration Statement on Form SB-2,
dated September 1, 2000, by Branden T. Burningham, Esq.
10.1 Lease Agreement, dated June 14, 1999, between Kyung Park and Bang Park,
landlords, and the Company.
10.1.1 Addendum to Lease Agreement, dated October 6, 1999.
10.2 Product Development Agreement, dated January 7, 2000, between the
Company and Nextelligence, Inc.
10.3 Internet Traffic Agreement dated January 7, 2000 between the Company
and NextTraffic, Inc.
10.4 Employment Agreement, dated July 16, 2000, between the Company and
William A. Mobley, Jr.
10.5 Escrow Agreement, dated as of December 29, 1999, among the Company,
certain stockholders of the Company and Christopher P. Flannery, as
escrow agent ("Flannery").
<PAGE>
10.6 Purchase and Sale of Assets Agreement, dated April 14, 2000, among
City-Guide ISP, Inc., David Marshlack, Dan Marshlack, Bruce C. Hammil,
Mark R. Dolan and Titan Hosting, Inc. and MegaMedia Networks, Inc.
10.7 Convertible Promissory Note, dated April 14, 2000, issued by Titan
Hosting, Inc. in favor of City-Guide ISP, Inc. in the principal amount
of $720,000.
10.8 Security Agreement, dated April 14, 2000, between Titan Hosting, Inc.
and City-Guide ISP, Inc.
10.9 Unconditional Corporate Guaranty, dated April 14, 2000, executed by
MegaMedia Networks, Inc.
10.10 Subscription and Registration Rights Agreement, Dated April 14, 2000,
between MegaMedia networks, Inc. and City-Guide ISP, Inc.
10.11 Employment Agreement, dated January 10, 2000, between the Company and
David A. Gust, to include exhibits and addendum thereto.
10.12 Employment Agreement, dated February 7, 2000, between the Company and
Steven H. Noble, III, and Stock Option Agreements and addendum as
exhibits thereto.
21 List of subsidiaries.
23.1 Consent of the Company's auditor, Parks, Tschopp, Whitcomb & Orr,
to be named in the Prospectus included in this Registration
Statement on Form SB-2.
23.2 Consent of Branden T. Burningham, Esq., to be named in the
Prospectus included in this Registration Statement on Form SB-2.
27 Financial Data Schedule reflecting the year ended December 31, 1999
and the six months ended June 30, 2000.
